John Wiley & Sons, Inc.

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.

Thank you and welcome, everyone. Joining me today are Brian Napak, Wiley's President and CEO, and Christina Van Tassel, Executive Vice President and CFO. A few notes to start. Our comments and responses to your questions reflect management's views as of today and will include forward-looking statements. Actual results may differ materially from those statements. The company does not undertake any obligation to update them to reflect subsequent events or circumstances. Also, Wiley provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends. These measures do not have standardized meanings prescribed by U.S. GAAP and therefore may not be comparable to similar measures used by other companies, nor should they be viewed as alternatives to measures under GAAP. Unless otherwise noted, we will refer to non-GAAP metrics on the call, and variances are on a year-over-year basis and will exclude the impact of currency. Additional information is included in our filings with the SEC. A copy of this presentation and transcript will be available on our Investor Relations webpage at investors.wiley.com. I'll now turn the call over to Brian Napak.

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 remain 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 non-strategic 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 sugarcoating 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, replace 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, academic publishing and university services. Overall, academic is focused on helping universities succeed by leveraging Wiley's full suite of content, platforms, and services. Academic generated an 18% EBITDA margin year-to-date, which is down from last year's 23% due to the effect of market headwinds on revenue. Also, Academic derived 62% of its revenue year-to-date from digital products and tech-enabled services. The talent segment includes our talent development and corporate training areas. In talent, Wiley is focused on helping employers succeed by delivering all of Wiley's training, sourcing, and upskilling solutions. Year to date, talent's EBITDA margin was 21% and 97% of its revenue came from digital products and services. Our research segment is unchanged. In research, we were already aligned with the customer, serving researchers and universities with research publishing, and serving corporations and other players in the research ecosystem with research solutions. Overall, research reported a 34% EBITDA margin year to date, and 95% of its revenue came from digital products and services. Okay, so let's turn to the detail of our third quarter performance, which was affected by two significant issues that we will talk about in detail. These are the continuing headwinds in academic and the pause of a Hindawi publishing program known as Special Issues. The publishing delays caused by this pause significantly impacted Q3 results and our Q4 growth expectations. As we review our financials, please note that, as always, variances exclude currency impact. Wiley's revenue for the quarter decreased by 2% due to the declines in our academic publishing, university services, and research publishing lines for the reasons discussed earlier. Christina will provide further details on our segment level performance. Our GAAP EPS was a loss of 129, mainly due to a non-cash goodwill impairment to our former education services segment and current university services line, totaling $100 million. This is $1.69 per share. This charge reflects the continued enrollment headwinds we're seeing in higher ed, rising interest rates, and lower market multiples. The gap loss also reflected restructuring charges related to the closure of our tech center in Russia. Adjusted EBITDA declined 3%, mainly due to revenue performance, offsetting corporate expense savings of $14 million. Our adjusted EBITDA margin for the quarter was 19.9% compared to 19.3% in the prior year. Adjusted EPS declined 9%, primarily due to revenue performance and $7 million of additional interest expense compared to prior year. Let me speak to the year-to-date headwinds in the academic market, which has been a struggle to predict this year. There are several components. First, academic publishing has been challenged all year by the pullback in discretionary consumer spending, notably affecting demand for our professional publishing. but also affecting academic content and courseware. Within academic, professional publishing was particularly challenged in Q3. It is our most consumer dependent line of business. Second, we've continued to see key online retailers adjusting their inventory practices, abruptly lowering their inventory levels at different times during the year. This is a typical, albeit unpredictable response by retailers in challenging economic moments. Third, higher education enrollment continues to be challenged by the continuing strength of the labor market, as would-be students gravitate directly to jobs rather than going to school for a degree. This factor has been persistent through the year, affecting both our university services and academic publishing lines. As the economy slows, much of this should reverse, but there is historically a 12- to 18-month lag between the start of a recession and a material increase in university enrollment. Finally, you may know that universities are now under significant financial stress due to issues with enrollment and funding. This has put pressure on the pricing of revenue share agreements and the demand for fee-for-service work. We continue to work with our long-term partners to solve for their challenges, and internally we're tailoring our offerings and right-sizing our cost structure to ensure healthy returns. Nonetheless, these pressures have impacted our year-over-year performance. We are confident that most of these headwinds are cyclical and thus temporary. Now, let's talk about the unexpected event at Hindawi, the open research publisher we acquired in January of 2021. In Q3, we temporarily suspended a fast-growing publishing program at Hindawi known as Special Issues. Special Issues are topic-specific issues of research journals. At Hindawi, these Special Issues are assembled and edited by external guest editors who are from the field and chosen for their specific expertise and position. In this case, we noticed misconduct in certain special issues under certain editors in which compromised papers were being submitted and accepted. To be clear, this was being done by non-Wiley editors and reviewers. Upon discovery, the Wiley team responded quickly, suspending the Hindawi Special Issues Program and fixing the source of the problem by purging the external bad actors and by implementing measures to prevent this from happening again. To date, these actions include increasing editorial controls and introducing new AI-based screening tools into the editorial process. We've also been scrubbing the archive and publicly retracting any compromised articles. This situation is disappointing to say the least, and it is consequential for the year. The current projected impact to our full-year outlook is up to $30 million in revenue and up to $25 million in adjusted EBITDA. Looking ahead, we expect this issue to have some impact on Hindawi submissions and publications in fiscal 24 due to the article backlog that has accumulated and the potential impact on the affected Hindawi journal brands. To state the obvious, we take this issue and all issues like it very seriously, and Wiley will do whatever is needed to protect the value of our brands and the integrity of the scholarly record. This includes proactively sharing our findings and best practices with the rest of the industry and working together to stop anyone from undermining the value of published scientific research. Continuing with research, Let's talk about how we're doing on our strategic and operational commitments for fiscal year 23. Our first commitment in research is to publish more to meet global demand and drive revenue. Unfortunately, the interruption of the Hindawi special issues drove lower volumes this quarter, with article submissions and publishing output both down 7%. Year-to-date, overall submissions were up 2%, with output down 4%. Notably, if we set aside the Hindawi publishing pause, OA submissions and output were up 10% and 4% year-to-date. So, demand to publish with Wiley, as always, remains solid. Beyond this, we're making very good progress on our publishing productivity goals, such as the referral rate of rejected articles from one Wiley journal to another. This is key since there was always pent-up demand to publish in Wiley journals. 70% of submitted articles are rejected by Wiley, mostly due to improper fit, not article quality. Increasingly, we're finding homes for these articles within our expansive journal portfolio. Year-to-date, 63% of rejected authors were offered another Wiley option to publish, up from 49% the prior year period. This is a great low-cost driver of consistent volume and revenue growth. We continue to make very good progress on transformational agreements, signing initial multi-year agreements in India, the Czech Republic, Hong Kong, and our first countrywide agreement in Canada. In the U.S., we signed new deals with Princeton, NYU, and Texas A&M. We also signed an important multi-year renewal in Japan, expanding it from four to 18 institutions. To date, Wiley has signed over 60 of these agreements, representing thousands of institutions in 23 countries. Looking ahead, the pipeline remains strong, and this is foundational to our research strategy. In Research Solutions, we signed 20 new partners in the quarter. This group includes leading academic societies, not-for-profits, and corporations. We also signed another major publishing peer, and they now subscribe to multiple Wiley services. To refresh, Wiley Research Solutions delivers the critical platforms and tech-enabled services that publishers, companies, and institutions need to succeed in the open research economy. Notably, upsells continue to accelerate across our Wiley network of over 900 partners, validating the scalability of our solution strategy. We signed 18 upsells deals this quarter. Notable wins include a career center partnership with a prominent scientific organization, a platform partnership with the world's largest technical society, and an education hub partnership for a major national medical association. The partner solution strategy has material revenue and profit potential, and we're very excited about the way that it is developing. We're working through some unusual challenges in research this year, but our strategy continues to be supported by favorable long-term trends and a very strong competitive position. Wiley has one of the world's leading journal portfolio brands, the industry's leading content distribution platform, and a large network of partners supporting our strategic direction. Let's turn to how we're doing with our key initiatives in career-connected education. As a reminder, We said we would expand our corporate and university client bases, and we are. We're making especially good progress in growing our corporate partner network. This quarter, we signed another five clients for Wiley Edge, our talent development brand. This included major multinationals in energy, consumer goods, information, and financial services. And the client pipeline remains very healthy. For our existing clients, we saw continued double-digit growth in employee placements through Wiley Edge. While demand has been strong through Q3, we continue to watch for hiring slowdowns given the challenging economic climate and the reported pullback in tech hiring. That said, there remains a long-term shortage of technology and digital business professionals in nearly every industry. And a recent survey shows that 80% of managers say they plan to increase their technology talent budget in 2023 to meet increasing digital demands. So the big long-term opportunity for Wiley is solid. Wiley continues to be an important strategic partner to universities. We recently signed a partnership with Columbia University School of Engineering and Applied Science to deliver engineering certificates to all Wiley Edge graduates. This is an exciting example of Wiley using its unique position in both academic and corporate education to bridge the talent gap and drive growth. We are very proud to be in partnership with Columbia, one of the world's preeminent academic institutions. Within our existing partner base, we added four new degree programs for a total of 60 new programs year to date. After the quarter closed, we added three new schools at Ohio University. This included 16 new degree programs and nine new certifications. While market-related enrollment issues remain, we continue to see demand from institutions for our gold standard university services. Turning to digital courseware, we continue to see good momentum, even in a challenging market environment. Our XyBooks courseware saw growth of 31% this quarter with strong institutional demand, especially from some of the most innovative and fastest growing universities. We launched new courseware solutions in information technology and in quantitative reasoning, and we signed large courses in STEM disciplines with national and regional institutions. XyBooks is a good example of widely finding success through focus and differentiation. In summary, Despite the macroeconomic and market headwinds, we continue to execute well on our commitments. I'm now going to pass the call over to Christina to talk about our results, our outlook, and how we're accelerating our Pan-Wiley simplification and optimization efforts, which we will outline in more detail in June.