John Wiley & Sons, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

John Wiley & Sons, Inc. is a global provider of content and technology solutions primarily in research, professional learning, and education, moving towards digital platforms and subscription revenue streams.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Wiley operates in three main segments: Research Publishing & Platforms, Academic & Professional Learning, and University Services.

  • Research Publishing & Platforms (47% of revenue in 2023): This segment focuses on providing research content and platforms for scientific, technical, medical, and scholarly research through journals, online databases, and related services. It includes subscription based and open access publishing models.
  • Academic & Professional Learning (31% of revenue in 2023): This segment includes education publishing, training materials, and content delivery for higher education, K-12, and professional markets. They are focusing heavily on online digital products and services, including online learning, professional development, and test preparation tools.
  • University Services (22% of revenue in 2023): This segment provides online program management (OPM) for universities as well as online test preparation services. It has been divested from in Q124 and it’s being treated as a held for sale segment.

The company’s core business is focused on providing knowledge and information through digital platforms, with a shift from print-based content to digital subscriptions and online learning solutions. This transition is crucial, as the demand for traditional print material has been declining. While this transformation is expected to grow revenues, there are significant challenges in this space including intense competition and technological changes.

Moat Analysis:

Wiley has a narrow economic moat, supported by strong brand recognition in specific areas, switching costs in educational publishing and unique assets in research content.

  • Intangible Assets (Brands): Wiley has established a recognizable brand over 200+ years, specially in the academic and research publishing industries. This brand recognition helps it in attracting authors and customers in a space where credibility is a must.
  • Switching Costs (Academic): Once educational institutions adopt the Wiley ecosystem of academic content, courses, and platforms, it becomes costly and time-consuming to switch to a new ecosystem. Switching costs create customer stickiness, enhancing profitability. Also, since some of the Wiley content is often a requirement by academics for their courses and the cost of switching to a new book/platform is not something that is usually paid by them, this creates more stickiness.
  • Economic scale (Niche/Proprietary Assets): In certain niches, like academic journals, access to data through subscription-based databases, or having long-standing relationships with authors, creates a competitive advantage that can be difficult for competitors to easily replicate.

The moat is not as wide as a lot of competitors in the space, especially concerning technology and online learning, it’s primarily based on proprietary information and historic relationships in traditional publishing, and therefore they get a rating of 3 out of 5.

Risks to Moat and Resilience:

  • Disruption through Technology: The publishing industry is increasingly undergoing rapid changes. The transition to digital products creates high pressure for traditional publishing companies. Wiley’s investment in online education and content platforms might be affected by its competition, and not be as strong and as quickly as they hope.
  • Competition: Competitors are not only other publishers, but also technological companies that focus on educational services. Also, the competition that exists in open access publishing could put pressure on subscription publishing revenues.
  • Changing Research Trends: With increasing emphasis on Open Science, and increasing prevalence of open-source academic information and tools, will impact the overall value-creation process of the research market. This might impact the future revenues and profitability for Wiley’s Research Publishing & Platforms business.
  • Economic Cyclicality: Though subscriptions might seem like recurring, stable revenue, their performance in the long-term will still be heavily affected by economic cycles since government funding for education, research and academia often fluctuates along with the economy. Also, corporate revenues allocated for employee training will fluctuate alongside business health.
  • Underperformance: A failure to successfully transition to digital may limit the company’s long term potential.

The business resilience is not as high as one may want, because it operates in a very competitive industry, where there are strong pressures, especially on the technology side. This industry also carries significant risks as the old business models are being disrupted.

  • Revenue Distribution: The company’s revenues are very diversified, both geographically, and by segment, with Research and Publishing platforms being the largest segment. They are also increasingly growing revenues in digital platforms, rather than traditional print publications.
  • Industry Trends: The publishing industry, especially for academic and research purposes is trending towards digital transformation. Publishers face pressures to provide access to online information in new, faster ways, as well as increased demand from customers for more flexibility in pricing and subscription models. Moreover, open access content in research and science has become a large threat for the established publishers.
  • Margins: Overall the company reports very strong gross margins, however, operating margins are relatively more volatile and can be affected by several factors, such as the cost of technology development and implementation, research and innovation investments, and the costs associated with acquisitions and restructuring, especially in the Education sector.
  • Competitive Landscape: The industry is highly competitive. There are competitors both in specialized areas, and also overall from many technological and large publishing houses, and smaller, niche publications.
  • Differentiation: Wiley differs from its competitors due to its well-established brand name in the academic world. It also has unique assets in scientific and other types of research, which creates high barriers to entry.

Financials:

Financial Results Summary for 2023:

  • Revenue: $2.01 billion, up 1% on reported terms, down 2% in constant currency.
  • Adjusted EPS: $4.11, a decrease from $4.58 in the prior year.
  • Free cash flow: $275.6 million vs $245.4 in prior year.
  • Adjusted EBITDA: $420.7 million, from $440 million in prior year.
  • Net Debt: 1,488.9 million from 1,548.8 million last year.

Overall, the company has been trending towards lower profits with higher revenue, which indicates pressures on margins. They also seem to be focused on generating higher cash flows.

Key Financial Ratios and Metrics:

  • Revenue Growth: While total revenue has increased slightly, there is a decline in constant currency, indicating the impact of foreign exchange rate fluctuations on revenues. Their core business is showing slow growth, but there is a very high emphasis on digital growth for the future, which will take time.
  • Profitability: Adjusted EPS is down, and operating margins are pressured by the changes in the industry. They need to balance investing in new avenues while maintain a certain profitability in the legacy segment.
  • Free Cash Flow: Their free cash flow has improved from the prior year and is an improvement that is most likely due to a mix of cost cutting and some increased cash flows in their core segments.
  • Capital Structure: Although the company is indebted, they have a high flexibility in managing their debt, and this has been a recurring theme of this company. Overall the debt is still significant, with 38.9% debt to assets, which makes it not super healthy, but stable.

Recent Concerns/Controversies/Problems:

  • Cost Inflation : They have seen continued high inflation on personnel costs, supply chain issues and acquisitions in general, which is cutting margins. Management is focused on controlling these costs as much as they can, but it will take time.
  • Digital Transformation Difficulties: The transition to online/digital platforms, which is key to their growth, is proving to be difficult. There is strong competition, and they are facing challenges in making this transition as fast as possible. Their OPM revenues have not grown as fast as one would like and their digital revenues are not growing fast enough to offset traditional print declines.
  • Revenue Growth Decline: There are many challenges related to organic revenue growth. The need to reinvest in the business and the need to have better marketing for their products is creating additional challenges.
  • Performance of University Services: The company recently divested this segment (mainly OPM) in light of the poor results of this business, and there is likely to be lingering costs associated with it.
  • Acquisitions: They have made several acquisitions in the past and still are making and considering more. While these acquisitions have a lot of upside, there is the risk of paying a premium that’s unneeded. Also, merging different businesses can be risky.

Based on the latest report:

“We are executing our strategy and moving quickly to strengthen our position as a leading provider of knowledge services and solutions. As we look to the future, we will prioritize our portfolio on higher-return, high-growth areas like online program management, digital courseware, and research solutions that serve important market needs. At the same time, we will continue to drive efficiencies to enhance our profitability and free cash flow. We remain committed to a value-creating capital allocation policy including our commitment to return capital to shareholders.” This quote encapsulates their strategy and the things they are focusing on for the coming years.

Understandability Rating: 2 / 5

While the core business of publishing is not difficult to comprehend, the company’s operations and the many different divisions can be somewhat confusing. Furthermore, the company’s ongoing transition towards a digital future, and the many acquisitions they make makes it significantly more difficult to understand the company’s strategy. Due to this I will give them a rating of 2 out of 5.

Balance Sheet Health: 4 / 5

While the company does have a large amount of debt, their cash flow generation ability is good. And, they are managing their debt appropriately, and have stated that they plan to reduce their leverage going forward. Also, they have a variety of liquid and intangible assets that helps balance the liabilities. Due to these factors, I believe their balance sheet is healthy, and give a rating of 4 out of 5.