Wiley's latest financial report (2)

[Ann Okerson <aokerson@gmail.com>]

Liblicense-l readers:  Please find here Mr. Sami Kassab's 
comments about the context for journal publishing industry 
financial reports. Thanks to him for taking the time to provide 
these good insights.

Any further, well-informed thoughts or comments, i.e., 
discussion, from members of this list will be most welcomed.

Ann Okerson

---------- Forwarded message ----------
From: Sami Kassab <sami.kassab@exanebnpparibas.com>
Date: Fri, Sep 23, 2011 at 1:46 PM
Subject: Re: Wiley's latest financial report

Hi Ann, Please feel free to post on your list as you see fit. 
Sami

************************

Profitability can be assessed in terms of growth versus last year 
(+13%) and in terms of a percentage of revenues (so called profit 
margins).

Profitability (as well as revenue) growth is driven by 3 factors: 
organic growth, acquisition growth and Foreign Exchange (FX) 
movements.

1) When Wiley or any company report profit growth or decline due 
to FX, they can't do anything about it. Global companies operate 
in different markets and do not control movements in FX. As a 
result, from a financial analysis point of view, it is fairly 
irrelevant (i.e. nothing to do with pricing policy, innovation, 
cost control, volume growth, etc).

2) Acquisition growth is also not an indicator of a company or 
management performance. In that case, they use cash they have to 
acquire businesses (most of the times they pay too much). It does 
not reflect the quality of a business. Anybody with cash (or 
willing lender) can acquire anything and hence show growth.

3) Organic growth is the important metric. Organic growth 
reflects the ability of the company and its management to grow 
the business, either through price increases, or through an 
improvement in the volume of goods they sell (more books, more 
subscriptions, more advertising, more new products, etc). 
Publishers have a history of organic revenue growth (through 
price increases, new product launches and new client acquisitions 
for instance in emerging markets).

Wiley does not report organic revenue growth, Reed Elsevier, 
Informa's Taylor and Francis, Thomson Reuters Science, Wolters 
Kluwer Health all do.

Wiley reports 3% growth excluding forex (i.e. acquisition + 
organic). I don't believe they made any significant acquisitions, 
so most of the 3% will be organic. To put things in context, 
Thomson Reuters Science & IP division reported 2% organic revenue 
growth, Elsevier Science and Technology reported +4% organic 
revenue growth, Informa's Taylor and Francis +5% and Wolters 
Kluwer Health +6% in H1 11.

More importantly, the profitability of Wiley STM division was 
reported at 42% in their last quarter (vs. 41% a year ago and 40% 
in Q1 09). Because revenues are growing more rapidly than costs, 
their profit margin is expanding.

Comparing this margin to other publishers is difficult, because 
Wiley reports a so-called direct contribution to profit. That is 
a profit before allocating all indirect costs that they have 
(overheads, technology costs). Other companies allocate these 
indirect costs to each division before publishing their numbers.

In order to compare, we need to allocate these indirect costs to 
each division (Wiley has three divisions). Using an allocation 
key based on revenues, I estimate that their comparable profit 
margin is closer to 28-30%. Informa and Elsevier are on c. 35%. 
They are likely to be somewhat lower as Wiley does more society 
publishing than the other publishers (owing to the Blackwell 
acquisition). Society get royalties, which reduce publishers 
profit margins.

In that context, Wiley has a reasonable profit level when 
compared to Elsevier and Taylor and Francis.

The larger question is whether an industry that generates 30-35% 
operating profit margin operates on reasonable and justifiable 
profit margins? This is a hard question, but if you look at other 
publishing industry segments than you see that legal publishing 
(Westlaw and LexisNexis) operate on lower operating profit 
margins (c. 25-30% for West and 15-20% for LexisNexis), financial 
information (Reuters, Bloomberg) are on around 20%, educational 
publishing (i.e school textbooks and college textbooks) operates 
on c. 10-15% for school and 20-25% for college textbooks. Within 
Media, the marketing services industry (Omnicom, Interpublic, 
Publicis, WPP) generates 12-17%. Newspapers (when not dead) tend 
to generate 10-15% operating profit margins. TV Broadcasting is 
on 10-15%.

Google operates on similar operating profit margins at 30-35%. 
The only Media segment that I know off with higher margins is the 
Yellow Pages industry with 45-50% but rapidly declining.

I believe that both the academic journal publishing industry and 
the yellow pages industry had this in common: they were the only 
place to find an information valuable to their users. For yellow 
pages, the decline in print directories usage has driven a 
decline in revenues (c. 15-25% p.a.) and an erosion of margins 
(more competition, in particular from Google).

As long as commercial publishers' content is widely used, there 
will be demand for subscriptions to their products and their 
revenues are unlikely to move a lot. With revenues fairly stable 
and some cost efficiency gains (technology + offshoring) profit 
margins are likely to remain where they are, in our view.

One golden rule in our capitalist system is that high profit 
margin increase the propensity of competitors to enter and 
industry (in order to participate to the high profit margins). 
More competition usually drives down margins. This happens until 
competitors exit the industry (go bust, close down, sell to other 
players). With less competition, margins increase again until 
they reach the initial point.

I hope it helps a bit...

Sami KASSAB
Analyst Media
Tel: +44 207 039 9448
Mob: +44 779 552 8365
sami.kassab@exane.com

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