Good morning, and welcome to the Wiley's Third Quarter Fiscal Year 2020 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.

Good morning, and welcome to Wiley's Third Quarter Fiscal 2020 Earnings Update. 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 measures, 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, 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. These 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. After the call, a copy of this presentation and a playback of the webcast will be available on our Investor Relations web page. I'll now turn the call over to Brian Napack, Wiley's President and CEO.

Thanks, Brian. Good morning, everyone, and thanks for joining. Let me start off by underscoring the valuable role that our business plays in the global knowledge economy. At its core, Wiley powers 2 essential drivers of the economy: scientific research and career-focused education. Our research business is a critical enabler of scientific, technological and medical discoveries, and these drive innovation, growth and human advancement. Our education business helps people gain the specific skills and knowledge they need to succeed in their careers. It's an exciting time for the global research industry. R&D spending continues to rise as institutions, companies and even nations compete to achieve breakthroughs that will lead to improvements in the human condition and economic gain. This competition drives steady growth of the research output that we publish. It also drives the need to continually improve and accelerate the research process itself. New fields of study are forming and existing research methods are being improved. Wiley plays a critical role in this ecosystem as a leading publisher of validated research and as a provider of the platforms on which the research output is created, endorsed, shared and consumed. In many ways, Wiley directly helps researchers succeed in their careers, while also helping universities to improve their standing and corporations to accelerate innovation. In education, the world is focused on greatly increasing access while improving relevance, affordability and impact. The overarching goal worldwide is to solve critical skill gaps, such as the massive one between supply and demand for technology talent. Wiley is addressing these gaps by focusing on the highest demand disciplines and careers and by delivering courseware and training that helps students to gain the skills, the degrees and the career credentials that the world is demanding. We have a long history of empowering education in university…

Thank you, Brian. Third quarter revenue of $467 million was up 4% over prior year, driven by organic growth of 2% and combined revenue contributions of $11 million from our Knewton, zyBooks and mthree acquisitions. Solid revenue growth and profit improvement continued in Research and Education Services. In Academic & Professional Learning, revenue performance improved over a challenging first half, largely due to an easing of downward pressure on Education Publishing revenue. In fact, as Brian noted earlier, our Higher Education business delivered modest organic revenue growth in the quarter. GAAP EPS of $0.63 rose 3%, including a restructuring charge of $0.04, which reflected a combination of costs related to severance and facility closures. A lower effective tax rate of 21% and lower foreign exchange transaction losses offset higher interest expense. Adjusted EPS was up 10% to $0.68, driven by organic revenue growth and savings from business optimization, partly offset by investment in growth initiatives, including acquisitions. Adjusted EBITDA rose 7% to $96 million, and our adjusted EBITDA margin for the quarter was 20%. Revenue through 9 months was $1.36 billion, up 5% as reported and 1% organically, driven by growth in Research and Education Services. Academic & Professional Learning revenue to date was down 4% as reported and 8% organically due to declines in book publishing. GAAP EPS for the 9 months declined by $0.33, driven by an unfavorable restructuring charge variance of $0.19, investment in growth and optimization initiatives and $7 million of higher interest expense related to increased outstanding debt. Our effective tax rate was 20% through 9 months, down about 1.5% from the prior year. Adjusted EPS declined 9% to $1.74, while adjusted EBITDA was down 1% to $263 million. Adjusted EBITDA growth of 6% in Research and an improvement in Education Services of $10 million…

Thanks, John. As a reminder, we are focused on 5 strategic pillars across Wiley: one, we focus squarely on the disciplined skills and careers that the world demands; two, we deliver the content platforms and services that our customers need to achieve their goals; three, we enable our offerings with powerful technology that drives real outcomes; four, we ensure that everything we do has a compelling price value proposition; and five, we continually optimize for efficiency and effectiveness. To recap, we saw good momentum again this quarter and our comprehensive client agreements driving open science and research, to our mthree acquisition closing the skill gap for tech talent, to our digital courseware momentum in higher education, to our ongoing success in signing new corporate university and society partnerships. Hence, Wiley is meeting the ever-increasing demands of the knowledge economy. As always, I want to thank our Wiley colleagues for their great contributions to our ongoing success this quarter and throughout the year, and thank you all for joining us today. With that as background, we welcome your comments and questions.

[Operator Instructions] Our first question comes from Drew Crum of Stifel.

Maybe a question on the guidance to start, John. The implied guidance for 4Q would imply a decline. You grew in the third quarter. Are there 1 or 2 factors that you're anticipating or baking into the guidance that's driving that year-on-year decline versus growth in fiscal 3Q? And I have a couple of other questions, but I'll wait for your response on that one.

Drew, I would say that the difference is principally related to the timing of investment in the period, including the effects of the acquisition. So we've added in -- in this period, we've added mthree to our results for 1 quarter ago. So I would say that's principal influence, but it's more just a timing thing of expanding across the year.

Got it. Okay. Okay. And then shifting gears to the Education Services business. Brian, I think you made a comment that you're seeing slowing enrollment trends for the spring semester. Could you expound upon that? And I know there is some attention given to the OPM model by some prominent politicians earlier in the year. Is that in any way changing the behavior of your university partners and what you're seeing in the market?

Yes, I'll answer the second question first. With regard to the environment, there continues to be a lot of discussion in the market about the future of the traditional OPM model. And the -- there were -- there was a letter that you're referring to from a couple of senators directed at the industry asking for information, which we've responded to, and we continue to be in dialogue with them. But no, there's no major impact that's happening at the client level. Everything that you would see in our performance is related to client-specific situations in the market that we participate and degrees where -- that we are servicing and providing. So I think that from the perspective of the enrollment, such an important -- it's such an important indicator for this business. We follow it very closely. Obviously, it's something that we want to monitor, we want to manage. Our -- this business is basically -- the growth in the core OPM business basically comes from the development of new partnerships, the implementation of new programs and the enrollment of students. We've got a great lineup of new partnerships. We are building new programs, have a great pipeline of them, and we're trying to optimize our enrollment pipeline at all times. There was -- and so that's really what we're doing, and we're watching it very closely. There's no systemic or broad-based reason for the slight slowing, but we're just keeping our eye on it and driving it forward. It's our way of keeping focus on what really matters in this business.

Okay, got it. And then just one more question, and I'll jump back into the queue. John, can you remind us what the puts and takes are on free cash flow for fiscal '20? And I guess, specifically, the fiscal 4Q, the guidance would imply, what looks to be one of the best performances for the business from a cash flow perspective over the last 10 years. Is that working capital related?

So Drew, a couple of things. One is, I would say, it won't be our best cash flow performance over that long a period of time, but it will certainly be a stronger free cash flow performance. And a key contributor to that is actually the timing of working capital. You'll recall that we were delayed on journal subscription collections the last year at the end of the fiscal year, which has a big impact on our cash for the year overall. The fourth quarter is very strong around cash collections on journals as is the third to a degree. And so with that delay, we pushed about $35 million of research journal cash collections into this fiscal year, and then we expect to be back at our prior pace again at the end of the year. So that's the biggest driver in the year-over-year swing to that $210 million to $230 million range that we've been guiding to all year.

[Operator Instructions] Our next question comes from Daniel Moore of CJS Securities.

I wanted to start with mthree. And Brian, I appreciate that overview in detail. I think I heard you say they're modestly EBITDA positive today, is that correct, first? Second, maybe just elaborate on the revenue model? And what does the margin profile of a student look like over that sort of 2 year, I'm calling it internship program, but the period where they're employed by mthree? And a quick follow-up or 2 there.

Yes. So I'll be a little bit more clear about the revenue model, and John can comment on the margin profile. So the way this business works is the students are recruited out of school, they become mthree employees through the training period and then convert to full-time employees of the client. During that period of time, we are charging for basically every day of that period a full -- the full equivalent of what that client would be paying to a new employee anyway. We are -- mthree will compensate the students, now called trainees, for every day, right? They're employees, so they're making money, but there's a delta between the amount that mthree is charging these people out to the client and the amount that the trainee is being paid. So that's how the business model works. And that's throughout the entire period, even when they are being trained. So effectively, we're paying for their education. And we are earning money on the -- and their support, and we're earning money on the difference between what the employer is paying and what we are paying the trainee. And from a margin perspective, the answer is yes, it is EBITDA -- It is slightly EBITDA positive now. It's a very attractive economic model. And as we said earlier, we expect it to migrate into the very attractive margins. John, do you want to comment further on it?

Yes, let me just elaborate a bit more. So as commented earlier, we expect really strong revenue growth out of mthree. We're anticipating very strong double-digit revenue growth in the business, looking into fiscal year '21. The business is currently modestly EBITDA positive as Brian noted, and we're expecting that mthree will be EBITDA positive in mid-single-digit rates in fiscal year '21. And from an EPS perspective, I noted that mthree will be dilutive to our earnings this year by about $0.07 for 4 months in the business. Next year, the dilution should be on the order of $0.10 from the business. So EBITDA positive and making its way to be accretive to earnings in the following fiscal year.

Read my mind and the follow-up is perfect. So I will switch gears and maybe just talk a little bit about -- forgive me if I'm butchering the pronunciation. But the agreement in the U.K. with Jisc. And I know you said, Brian, that it would be essentially comparable from a value perspective at $30 million. Maybe just talk about any margin impact and similarities or dissimilarities relative to the agreement in Germany as far as kind of upside and leverage to volume publication over time?

Yes. So each of these deals is a little bit different because the funding sources are different, the nature of the tastes of the consortia are different and so forth. But they all have certain things in common, such as the blend between what we would have called subscription revenues and what we would have called Open Access revenues. From a comparative perspective, the deal will be public in 30 days. So we're not going to comment on the very specific nature of it. But this one, just like the German deal and just like all of our deals, are fundamentally volume based, meaning that the PxQ equation holds. The more we publish, the more we make. And so we -- those are the dynamics of these that we like. And so we expect that over time to inure to our benefit as our share continues to increase in the marketplace. From a margin perspective, we view these deals, as in the long run, roughly equivalent to the business that we have. And we are continuing to evolve in that direction, and we believe that there are sustainable -- that these businesses -- that the business becomes sustainable, but now has the overall enhanced characteristic of being able to grow based upon the share that we're gaining. So that's the way we're thinking about them.

Very helpful.

And the way we think about this deal.

And in the short run, no material change for fiscal '21 from a financial perspective?

No. The market is evolving according to our expectations. There's nothing unusual about this. It's a slow transition. As you can see, as you know, the Open Access [indiscernible] our businesses are significantly less than 10% still of business. We will continue to see it evolve. And it's all in line with our expectations. We're very calm and comfortable with it.

Very good. Well, I'll sneak one more in. Just switching gears to the print text. The decline is moderate...

I just will say that -- I will say that it is notable that our -- not to pat ourselves on the back, but our leadership in this area has resulted in healthy and positive discussions all around the world. And I think it is being -- it is coming through in our article submissions, which are significantly above market at this point in time. People are choosing to work with Wiley, and that's a very positive effect. And that, we believe, in the long-term sustainable economics of this with growth on top of it leads us to have a lot of confidence in the future of the Research business and gives us confidence in the investments we're making there for growth.

Perfect. Fair and noteworthy point. Last question, on the print text declines moderating this quarter, it seems like we've seen this in the last couple of years, kind of a big drop at the beginning of the academic year, followed by some moderation. Is that -- is it sort of the new norm of how universities are purchasing being more conservative upfront? Or is it just more of an anomaly than a pattern?

Well, what I would say is it is first and foremost in this discussion, we're not saying that we completely understand where this market is going to go in the long run from a volume -- revenue volume perspective. As from my comments, we believe in the unit -- there is the unit consumption as indicated, and we are repatriating those units on a regular basis, sometimes at a lower price. But as you heard in my comments over time, we sort of like that transition because we get significantly more sell-through. And even at lower unit costs, the sell-through, which for zyBooks might be 90-plus percent, lines up with us in a better revenue and a better profit perspective, but we're not calling bottom, right? That's just not -- we don't know. The print revenues are -- continue to be a bit unpredictable. There have certainly been a number of things from an amount of inventory and market perspective and movements there. I think we are -- and there have been changes in the cycles, which universities -- it's not universities, but which bookstores and the channels buy inventory and how they're thinking about returning them. All of those are -- that we've identified are anomalous trends. Certain large distributors seeking to reduce their working capital in one period or seeking to stock up in a different period or better match supply and demand, they're all trying to figure out this market as well. So no, nothing that I would consider predictable or endemic to the marketplace, with the exception of when we move to digital revenue, the purchase tends to be a little bit later, but there are no returns. And we like that. So what we've seen, over time, a little bit of slippage from, say, August to September or from December to January because, of course, digital revenues don't require a sell-in [indiscernible] when they happen. So I think that's the best I can say on that at this point in time.

There are no further questions. I'd like to turn the call back over to Brian Napack for any closing remarks.

All right. Thanks, everyone, for joining us on the call today. We look forward to giving you our fourth quarter results and full year results in June. Thanks, again.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.