Good morning, and welcome to Wiley's First Quarter Fiscal Year 2020 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to introduce Wiley's Vice President of Investor Relations, Brian Campbell. Please go ahead.

Hello, everyone, and welcome to Wiley's first quarter 2020 earnings update. With me in the room is Brian Napack, President and CEO; and John Kritzmacher, CFO and EVP Operations. A few reminders to start, first, 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. Second, Wiley provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends. Non-GAAP metrics which generally exclude items that impact comparability comprise the following: adjusted EPS, free cash flow less product development spending, adjusted operating income and margin, adjusted contribution to profit, adjusted EBITDA and results on a constant currency basis and results excluding the impact of acquisitions. These performance measures 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. Also note, we abbreviate constant currency as CC. Please see the reconciliation and explanations of all non-GAAP financial measures presented in the supplementary information included in our press release. Important to note, all variances in this presentation exclude the impact of currency unless otherwise noted. For those who prefer to listen to the call over the phone, but still want to view the slides, we recommend that you click on the gears icon located on the lower portion of the left-hand side window and select Live Phone. This will eliminate any delays in viewing the slide transitions as well as remove any potential background, if you prefer to ask a question. After the call, a copy of the presentation and a playback of the webcast will be available on our Investor Relations webpage. I'll now turn the call over to Brian Napack, Wiley's President and CEO.

Thank you, Brian, and thank you all for joining us today. I'm going to start with a brief refresher on the new segment definitions that we announced last quarter. Going forward, we will be reporting on the following three segments: Research Publishing and Platforms, Education Publishing and Professional Learning, and Education Services. These segments align well with the way we manage the business and with our growth strategy. Research Publishing and Platforms or Research is essentially unchanged from prior periods. It includes our research journal publishing, our author services, and corporate services, and Atypon, our research platforms business. For context, this segment accounted for over half of Wiley's total revenue this quarter. The second segment, Education Publishing and Professional Learning delivers educational products in the form of content and courseware, Test Prep programs, corporate training and digital learning platforms for students, professionals, universities and corporations. Within this segment, Education Publishing refers to our higher education and reference publishing and our Test Prep business. Professional Learning refers to our Professional Development programs, corporate training services, and professional books, which are all focused on the development of skills and capabilities in corporate settings. Education Publishing and Professional Learning accounted for around a third of total Wiley revenue in the quarter. We like the potential synergies and efficiencies enabled by this new alignment. Education Services is our third segment. It delivers tech-enabled services that help universities, corporations and students to achieve important educational outcomes. This segment includes degree program management and credentialing services such as boot camps. Education Services accounted for 12% of revenue this quarter and is growing nicely. Please see the attached financial schedules for more financial detail regarding these segments and see our August 8-K for historical segment restatements. With that context, I'll now give an overview of the key…

Thank you, Brian. Our free cash flow performance for the quarter was favorable by $45 million, consistent with our expectations for clearing the fourth quarter backlog of calendar year 2019 journal subscription collections. As a reminder, Wiley's cash flow is typically use of cash in the first half of the fiscal year, principally due to the timing of collections for annual journal subscriptions which is heavily skewed toward the late fall and winter months. Cash from operations for the quarter was a use of $94 million, a $51 million improvement over prior year, while free cash flow improved by $45 million to a use of $125 million. Capital expenditures, including technology, property and equipment and product development spending rose $6 million to $30 million due to expected investment in products and platforms. Balance sheet remains strong with our net debt-to-EBITDA ratio at 1.7 inclusive of our recent acquisitions. We continue to return cash to shareholders in the form of dividends and share repurchases. In June, the company raised its dividend to $0.34 per quarter, a 3% increase over prior year. During the first quarter, we also repurchased 218,000 shares at an average cost per share of $45.97 for a total share repurchase of $10 million. Approximately 1.7 million shares remained in our current repurchase authorization. We are tightly focused on executing our strategy to lead in research and career focused education. Our strategy includes company-wide business optimization initiatives, which are enabling efficiency improvements and savings across the business. In connection with these optimization initiatives, we recorded an $11 million restructuring charge in the quarter. The charge reflects actions to reduce management layers and increase spans of control in several parts of the business. It also reflects actions underway to implement process improvements across several functions, including content management, technology and…

Thanks, John. Let me quickly summarize the key messages for this quarter. Performance was mixed in the first quarter, good revenue and EBITDA growth in Research and Education Services offsetting decline in Education Publishing and Professional Learning. We're pleased with the momentum we're seeing key strategic areas of our business, which is Research Publishing overall, Open Access, Atypon and Education Services. We experienced softness in Education Publishing and Professional Learning, specifically in books and Test Prep, but we expect better performance through the rest of the year. This, along with our planned investments, resulted in a significant quarterly earnings dip. Cash flow performance for the quarter was favorable by $45 million or a 26% improvement over prior year showcasing the strong and sustainable cash flow characteristics of our business. We're very pleased about the progress we're making in implementing our strategy to lead in Research and Education, while improving the efficiency and effectiveness of our businesses. We added critical capabilities and momentum in Education with the zyBooks and Knewton acquisitions, and in doing so, have advanced our key strategies to lead in high growth disciplines, have great education technology and deliver affordable solutions for students. Finally, we are reaffirming our full year outlook updated for the acquisition of zyBooks. For the year, we expect revenue and cash flow improvement, but an earnings dip as we invest in growth and acquisitions. As noted in June, we expect those investments to result in significant improvement in fiscal '21 and beyond. I want to finish by thanking all of our wonderful Wiley colleagues for their great contributions to our growing momentum and to the ongoing success of our researchers, learners, corporations and universities around the world. And thank you all for joining us today. One reminder, we would love to have you attend our upcoming Investor Day scheduled for Friday, October 5th in Hoboken, New Jersey. We will have various members of the team presenting and providing more color on our strong markets and on the road ahead for John Wiley & Sons. If you're interested in attending, which we hope you are, please RSVP to Brian Campbell. With that as background, we welcome your comments and questions.

[Operator Instructions] And our first question comes from the line of Daniel Moore with CJS Securities. Your line is now open.

Let me start with zyBooks, the recent acquisition. Based on guidance, it looks like EBITDA was -- is at least on a trailing basis, negative by a few million dollars. Just wanted to check if that's correct? And number two, just more strategically, what is it that they bring to the table? I think you gave good color, Brian, but maybe a little more color on what they bring to the table that, you -- Wiley hasn't developed internally? And I have quick follow-up there. Thank you.

So Dan, it's John. As we noted in the slides, we're going to see a modestly adverse impact to EBITDA from the zyBooks acquisitions in the year. But its rate of growth going forward is substantial. And so, with its growth we expect to get into EBITDA positive territory quickly.

And I'll pick it up from there. From a strategic perspective, as I think I commented on, zyBooks fits perfectly with our strategy, this three part, three pillar strategy that I reviewed a couple of times with regard to targeting high growth disciplines in high growth job categories so that the education we provide is -- the education is being demanded in the marketplace as driven by the labor market. I'll talk about the technology platform as well. They deliver very innovative technology platform and take a digital first approach to publishing which is very different than the way anybody has previously published in these areas, essentially they are providing the content to students in a really easily digestible, accessible way, very lightweight, and then following that up with hands-on activity that drives home the learning. This lightweight approach is extremely engaging for students who don't want to read the chapters after chapters in textbooks and really want to get their hands-on and start learning right from the start. And so that approach has come up with a course catalog in these high-growth disciplines that is growing extremely rapidly. This digital-first approach to publishing means that we don't have to come out with new additions every few years, we can continue to update content as we go along. And because it’s lightweight content, the content itself is cheaper to create. So in total we can deliver effective outcomes that are lower cost to create, lower cost to the student and ultimately very profitable. So as you know, Wiley is focused as a publisher in higher ed. We're not trying to do everything. We're trying to focus on disciplines where they there will be growth. We're trying to focus on -- in disciplines and courses where the technology really makes a difference and we’re trying to deliver these things on a low cost basis. To the extent that I'm repeating myself it's because I think that those messages are really important. We're not trying to do everything. We're trying to win where the market needs great solution. So why didn’t we deliver this stuff ourselves? Fact is this is a completely different way to publish. This digital-first approach to publishing is lightweight, not text-heavy. Demonstration heavy content is much more appealing and the idea that this particular company had innovated to the numbers that I indicated, here we're talking about over half a million students have already been exposed to this stuff, means that we’re buying success and momentum in addition to the innovation. So for us it was really a no-brainer. It was hand in glove with our strategy and we believe this is one of the key elements that will help us to return that business to growth.

You did cover a lot of that but the -- fleshing it out helps. So, thank you. Just switching gears, Education Services, pretty good momentum, 9% organic growth. To what extent is Learning House helping the, I hate to use, the Deltak, the kind of legacy but the legacy OPM businesses find their footing. Maybe any color there? And then just a glide path stronger operating margins in the past where you talked about double-digit as a goal. Any color in terms of timing when we get to stronger operating margins for the segment, it would be helpful? Thank you.

You bet. I will address both of those questions. It’s Brian. From the perspective of what Learning House brings to the table, we found in Learning House a very complementary company to our Wiley Education Services formerly as you point out called Deltak a number of years ago, we found a very complementary company on a number of different levels. The first way that it’s complementary is that it brings a different sort of school into the mix. It brings -- it has brought smaller schools into the mix, ones that really need us in order to succeed, schools that can’t succeed without us. And that balance of smaller, high quality but smaller regional schools balances nicely with our more prominent larger schools that Deltak had service and that Wiley Education Services services now. And so the portfolio is a very nice balance now that is unequaled in the marketplace. We had a full range of schools from big marquee schools down to small high-quality regional schools, and we feel that, that is a real strength. They're able to move quicker. They're able to work more closely with their partners. And these partnerships are very, very sticky. So A, portfolio. B, and I won't go into great detail, but each of the company's had strengths. Strengths in enrollment, strengths in identification of students, strengths in the design of programs, strengths in the management of those programs, strengths in relationships. And the combination of the two was extremely complementary. So that was great. We found two really good management teams. And instead of picking one and getting rid of the other, we blended the two to take the best of each. So combined now we have an extremely strong management team and I will unabashedly say I think we have the…

We specifically -- in our fiscal year '22 targets that we talked about on our last call, when we provided a view of where we see ourselves headed longer term, we specifically called out that Education Services we're driving to be in the range of 15% EBITDA margin in the third year out.

Yes. In the third year out. So -- and we're sticking to that. That’s what we believe we're going to be doing.

Thank you. And our next question comes from the line of Drew Crum with Stifel. Your line is now open.

So I think you suggested that the Ed Publishing Professional Learning segment would grow with the inclusion of Knewton and zyBooks for fiscal '20. If you back those out, how are you thinking about the performance of the legacy business through the balance of the fiscal year? And I just -- kind of drilling down a little bit deeper within that segment, that the Test Prep business was down in the quarter. You get some very difficult comparisons in the second half of the fiscal year. But you suggested that the business would be up double-digits. Can you just reconcile that or help us understand what the drivers are?

Sure. First in terms of expectations, if you will, for the base of the business, for the balance of the year, our view for the year has been to see mid-single-digit decline in revenue, and some substantial erosion of profit margin along with that during this transition period. So the performance in the first quarter is in line with our assessment there. We still are anticipating mid-single-digit decline overall in the traditional businesses there. But we do see on the back half of the year generally more strength as compared to the prior year. We've got efforts underway to address our cost structure. And we're going to see -- as you noted, we're going to see some growth out of the businesses that we acquired. So overall, no big surprises, somewhat lower than expectations in the first quarter. But nothing that materially changes our view around that for the year. Test Prep, we had a couple of things that hit us in the first quarter. As Brian described, we saw some softness in GMAT. Frankly, a big part of that was that we released a new edition in the fourth quarter which saw very high demand. So that tended to have a bit of a trough incoming inside of first quarter. There’s also some softness in GMAT candidates. But expect some of that's going to work its way out over the balance of the year. So the timing in general there around the new edition released in the fourth quarter. On the CPA side, we ran into some challenges around pricing execution in e-commerce. We've addressed that, demand’s picking up again in the month of August. So we had a little bit of a bump in the road, but we believe that we're on track to hit our goals around CPA excel for the year as well.

And then just shifting gears to …

Overall -- just, Drew, if I could just to add on, to reiterate a comment that Brian made. We do still anticipate solid double-digit growth in Test Prep for the year. We fully anticipate with the acquisitions, as you noted, that we will actually see for the year albeit a bit of inorganic contribution. We do expect to show revenue growth in the segment for the year.

And I'll just add on the traditional publishing side of the business. We are seeing early indications of the strategy that we're putting in place playing out. It takes a while for these things to play through in the marketplace. But we feel pretty good about our publishing program and what we're seeing from a momentum perspective. I'm not getting out in front and making big promises here. But I think we're going to see that business continue to strengthen in the quarters, and in the years to come. That doesn't change our outlook or what we're saying. But we can see inside the business and see what's happening and we're positive about it.

And then just maybe shifting gears to the gross margin line. I know what the metric that you tend to focus on was. But it was down 270 basis points in the quarter to 66%. If I look at your business over the last four or five years, this is a line that was consistently in the low-70s range. So I guess specific to fiscal 1Q, can you talk about what drove the lower gross margin? And is that kind of indicative of what you've seen across the business the last couple of years? And I guess looking forward, where do you see gross margin selling out at?

So Drew the single biggest factor in our gross margin is going to be the impact of our growth, substantial growth in Education Services, right? That’s going to be a lower gross margin business at this stage in its development. So that's by far the most significant contributor and we talked a few moments ago about our expectations for driving improvements in the EBITDA performance up to 15% EBITDA as a percent of revenue in fiscal ‘22. So that's a key contributor. And there is a bit of pressure in other parts of the business. I would note and we've been upfront about this but there is some pressure on royalties in the Research Journal business where it’s highly competitive and we’ve seen some pressure there. We are managing our portfolio to optimize our spend on royalties associated with journals. And then I would say consistent with what you've noted around some pressure on margin, we're working really hard on what we’d refer to as business optimization initiatives which really improve the speed and quality with which we get things done. But the fundamental consequence of those things is that we’re lowering cost to protect and improve our bottom-line. So you are going to see a little bit of a rotation, you’re going to see us drive some expenses below gross margin in order to balance it out overall. But we are still very much committed and confident in our ability to improve our overall operating margin over the planning period that we talked about.

Thank you. [Operator instructions]. And our next question comes from the line of Nick Dempsey with Barclays.

First of all Springer Nature, excluding the Nature titles is charging the same article processing charge that you are as part of their recently announced deal with Projekt Deal in Germany. I imagine that Springer Nature, ex-Nature has a much lower impact, right, on your full collection of titles. So did they get a better deal in Germany there? Second question within Education Publishing I appreciate that it was down 10% constant currency. I know there is some small benefit from acquisition in there. Are you able to tell us what the decline was excluding those acquisitions in the quarter?

Okay, so we will take them in order. I will take the Springer Nature question; John will take the Ed Pub decline question. So look, all these deals are different. This deal hasn’t been announced publicly. It hasn’t even been made publicly. We did note with interests that they excluded the Nature titles, which is the preeminent brand in the industry. It is not surprising that Springer Nature wanted to exclude them for the obvious reasons. We don't -- and yes you're right with some of your assertions about that impact factor but each one of these deals is different. We're going to study it in detail when it comes out. We believe that any material improvement in terms will cascade -- from our perspective will cascade through the market in the long run. We're very pleased with the deal that we did. We believe it's a sustainable deal. It sets a benchmark for an orderly transition for those parts of the world in those territories that can move in that direction. We're very optimistic about it. So I think we'll have more to comment on when we -- when they actually signed a deal and when we actually see the details. But right now we were not at all discomforted by what we saw on the marketplace and feel pretty good about what it indicates for the future of the transition.

And then Nick, to your question about Education Publishing down for the quarter, how much was that actually mitigated by acquisitions that we made? The acquisitions were Knewton, as we discussed at the front end of the quarter, and then zyBooks in the last month of the quarter, so only one month of zyBooks in our results. The overall contribution to our performance in the quarter, really not material, on order of $2 million to $3 million of revenue.

Thank you. And that does conclude today's question-and-answer session. I'd now like to turn the call back to Mr. Napack for any further remarks.

Yes, just I want to thank everyone for joining us on the call today. We're going to look forward to talking to some of you, hopefully many of you in October at our Investor Meeting. And we look forward to presenting our second quarter results in December. And until then, we will see you soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.