Description

JOHN WILEY & SONS (WLY US / $2.0bn market cap / $16m ADTV)

Summary investment case

The core investment case is margin recovery through cost saving and divestment of non-core businesses under new management, which should also allow the remaining core franchises to re-accelerate growth. This will generate a re-rating given the shares currently price in ~2% LT growth or alternatively trade on ~9-11x normalised EV/NOPAT whereas RELX or Wolters trade on 28-31x. McGraw Hill (2021) and Houghton Mifflin PMT values: 2.8x sales / 12x EBITDA and 2.6x sales / 10x EBITDA respectively. The journals industry is robust and defensive. I expect it is well known it is on a solid footing relating to the transition to Open Access (the bear case of the 2010s). It is less well known that this shift, with some technology investment in the publishing platforms, is enhancing organic growth rates from 1-2% to 4-5%. We can buy the shares with a wide margin of safety because (1) Hindawi quality issues are likely still impacting sentiment / lingering concern of reputation impact to journals, (2) Wiley is only just emerging from period of multiple profit warnings, (3) it is a small cap and only covered by 1 analyst (not major house), so the AI angle is underappreciated. Wiley has announced two 3-year LLM training content licensing deals for $20-25m each; they are “speaking to everyone” and with 75%+ dropthrough one can make the argument this could add 50-100% to the $200m normalised FCF target the company has. No further deals are included in guidance but are highly likely. BASE CASE FV $68-87/sh = +70-115% upside (bull case $125-150 / bear case $37-40).

Description of key divisions, products & services

Wiley is one of the world’s largest publishers and a global leader in research and learning and has done so since its foundation in 1807. Operations are primarily located in the United States (US), United Kingdom (UK), India, Sri Lanka, and Germany. In FY2024, ~47% of revenue was from outside the US and over 83% of revenue is digital.

Research [56% sales / 32% EBITDA margin]: provides peer-reviewed scientific, technical, and medical (STM) publishing, content platforms, and related services to academic, corporate, and government customers, academic societies, and individual researchers. Journal publishing categories include the physical sciences and engineering, health sciences, social sciences and humanities, and life sciences. Research customers include academic, corporate, government, and public libraries, funders of research, researchers, scientists, clinicians, engineers and technologists, scholarly and professional societies, and students and professors. Research products are sold and distributed globally through multiple channels, including research libraries and library consortia, independent subscription agents, direct sales to professional society members, and other customers. Publishing centres include Australia, China, Germany, India, the UK, and the US. 96% of revenue is generated by digital and online products & services.

Key strategies include driving publishing output to meet the global demand for peer-reviewed research and expanding platform and service offerings (e.g., workflow solutions) for corporations and societies.

Research Publishing generates its revenue from contracts with its customers in the following revenue streams:

• Journal Subscriptions (“pay to read”), Transformational Agreements (“pay to read and publish”), and Open Access (“pay to publish”)
• Licensing, Backfiles, and Other.

At end FY2024 Wiley publishes >1,900 academic research journals. It sells journal subscriptions directly to thousands of research institutions worldwide through sales representatives, indirectly through independent subscription agents, through promotional campaigns, and through memberships in professional societies for those journals that are sponsored by societies. Journal subscriptions are primarily licensed through contracts for digital content available online through the Wiley Online Library platform. Contracts are negotiated directly with customers or their subscription agents. Subscription periods typically cover calendar years. Subscription revenue is generally collected in advance. ~53% of Journal Subscription revenue is derived from publishing rights owned by Wiley. ~47% of Journal Subscriptions revenue is derived from publication rights that are owned by professional societies and other publishing partners such as charitable organisations or research institutions and are published by Wiley on long-term contracts or owned jointly with such entities. These alliances bring mutual benefit: the partners gain Wiley’s publishing, marketing, sales, and distribution expertise, while Wiley benefits from being affiliated with prestigious organisations and their members. Societies that sponsor or own such journals generally receive a royalty and/or other financial consideration (Exane estimates 10-15%). Contributors of articles to Wiley’s journal portfolio transfer publication rights to it or a professional society, as applicable. Examples of the societies represented:  American Cancer Society, American Heart Association, American Anthropological Association, American Geophysical Union, and German Chemical Society.

Open Access business model: accepted research articles are published subject to payment of article publication charges (APCs) and then all open articles are immediately free to access online. Contributors of open access articles retain many rights and typically license their work under terms that permit reuse. Open Access offers authors choices in how to share and disseminate their work, and it serves the needs of researchers who may be required by their research funder to make articles freely accessible without embargo. APCs are typically paid by the individual author or by the author’s funder, and payments are often mediated by the author’s institution. Wiley provides specific workflows and infrastructure to authors, funders, and institutions to support the requirements of Open Access.

Wiley offers two Open Access publishing models:

1. Hybrid Open Access where authors publishing in the majority of our paid subscription journals, after article acceptance, are offered the opportunity to make their individual research article openly available online.
2. Fully open access journals, also known as Gold Open Access Journals. All Open Access articles are subject to the same rigorous peer-review process applied to subscription-based journals. As with the subscription portfolio, a number of the Gold Open Access Journals are published under contract for, or in partnership with, prestigious societies, including the American Geophysical Union, the American Heart Association, and the British Ecological Society. The Open Access portfolio spans life, physical, medical, and social sciences and includes a choice of high impact journals and broad-scope titles.

Transformational agreements (“read and publish”) is an innovative model that blends Journal Subscription and Open Access offerings. Essentially, for a single fee, a national or regional consortium of libraries pays for and receives full read access to our journal portfolio and the ability to publish under an open access arrangement. Like subscriptions, transformational agreements involve recurring revenue under multiyear contracts. Transformational models accelerate the transition to open access while maintaining subscription access.

Learning [31% sales / 35% EBITDA margin]: provides scientific, professional, and education print and digital books, digital courseware to libraries, corporations, students, professionals, and researchers, as well as assessment services to businesses and professionals. Learning strategies include selectively scaling high-value digital content, courseware, and assessments; continue to implement strategies to manage print revenue declines while driving growth efficiently and effectively in digital lines of business.

Focus areas: business, finance, accounting, management, leadership, technology, behavioural health, engineering/architecture, science and medicine, and education.

Channels & go-to-market: chain and online booksellers, libraries, colleges and universities, corporations, direct to consumer, websites, distributor networks and other online applications. Products are sold to brick-and-mortar and online retailers, wholesalers who supply such bookstores, college bookstores, individual practitioners, corporations, and government agencies.

Publishing centres include Australia, Germany, India, the UK, and the US.

Materials for book publications are obtained from authors throughout most of the world, utilising the efforts of a best-in-class internal editorial staff, external editorial support, and advisory boards. Most materials originate by the authors themselves or as the result of suggestions or solicitations by editors. WLY enters into agreements with authors that state the terms and conditions under which the materials will be published, the name in which the copyright will be registered, the basis for any royalties, and other matters. Author compensation models include royalties, which vary depending on the nature of the product and work-for-hire. Wiley may make advance royalty payments against future royalties to authors of certain publications. Royalty advances are reviewed for recoverability and a reserve for loss is maintained, if appropriate.

Wiley continues to add new titles, revise existing titles, and discontinue the sale of others in the normal course of our business. It also creates adaptations of original content for specific markets based on customer demand. General practice is to revise textbooks every 3-5 years, as warranted, and to revise other titles as appropriate. Subscription-based products are updated on a more frequent basis.

Wiley generally contracts independent printers and binderies globally for their services, using a variety of suppliers and materials to support our range of needs.

It has an agreement to outsource US-based book distribution operations to Cengage Learning, with the continued aim of improving efficiency in our distribution activities and moving to a more variable cost model. As of April 30, 2024, it had one global warehousing and distribution facility remaining, which is in the UK.

Book sales for Learning are generally made on a returnable basis with certain restrictions. Wiley provides for estimated future returns on sales made during the year based on historical return experience and current market trends.

Key tenets of the business model

• Integrity of science: mgmt. of peer review is the primary value-add, i.e., quality control. Wiley and peers enable communication between blind reviewer and author.
• Research assessment: academics are reliant on grants and grants are judged based on the number and quality of research papers. This creates a classic flywheel effect for top journals. The way scientists are assessed around the world is consistent – people have tried and failed to change.
• Publishers provide various value-add services which are not the universities etc primary skillset: Formatting of content (IP of authors) & language editing, e.g. nuclear physicist from Italy needs to be edited by a native language specialist; Copy editing – indexing, linking etc; “Bells & whistles”, e.g., visualisation of data. The disintermediation argument of 10-20Y ago hasn’t played out – it’s notable that Green OA never took off (“like fine cuisine served on a plastic dish”, ex Wellcome Trust CEO). The functions Wiley & co provide are essential for article discovery and the preservation of the record of science (i.e., allowing the article / author to be found and referenced).
• The current status quo between OA / subs is unlikely to alter much: Most of Europe (ex-France) has moved to R&P. China / US not going down R&P model (subs still dominant) – in trad subscription costs of publishing are borne by the readers, under OA the cost is borne by researchers => In US have delineation between teaching & research universities so Harvard / Stanford research costs would go up by 50%. Today China is 20% of the volume of scientific content but 5% of the STM market due to favourable deal / agreement made.

Key value drivers

• High recurring revenue (~50% of t/o) from subscriptions => attractive WK characteristics. Deferred revenue 99-109 days of sales over past 7Y. Inventory coming down since shift from print to digital (from ~50 days to ~20). Overall WK % sales -30% so any growth is a tailwind for FCF generation.
• High gross margins: Research has delivered 72-75% since 2010. Learning 75% in FY24 but consistently 72-73% previously on my estimates.
• EBITDA margin 20-24% historically: 68-70% of GP has typically been reinvested in SG&A – this appears to be a line item which will be made more efficient.
• Wiley has historically shown operating profit / EBIT after subtracting amortisation of acquired intangibles (but adds this back for adj PBT / EPS). This has deflated EBIT margins by ~2ppts vs a closer representation of the business economics. Note that the company’s representation should change materially given the large write offs and sale of acquired businesses and be a tailwind for P&L margins.

• Actual capex (tangible & intangible) matches up closely with the underlying D&A calculated above. This is ~5-6% combined on a normal basis. Expect 2025e to be higher (~8% of sales) before dropping back. On top of this, WLY also acquires publication rights (mostly associated with the societies publishing business), which I expect to be single digit $m ($5m p.a. modelled). Cash was used for M&A over the past decade, but it is clear this is strategically off the agenda in any meaningful scale.

• Overall FCF generation is a great strength of the business (10-15% FCFe margin) supporting investment and shareholder returns (30Y unbroken dividend growth) => covered in more detail below.

Investment case detail (hypothesis, evidence, valuation & timing)

Margin recovery from restructuring (and management change)

Margins are currently depressed versus history and potential earning power. I put this down to (1) lack of strategic focus and cost efficiency, (2) Hindawi quality control issues in Research. Both are temporary and fixable, rather than structural. The CEO leading the restructuring & recovery is deeply experienced and knows the business inside out (over 20Y on the Board). The strategy is sensible and aligned with the recovery lifecycle stage, with clear strategic and financial goals. I've been able to verify the achievability of the numbers through my own modelling.

During 2010-20, low industry growth rates concern around the threat to the journals business model from Open Access (OA) led to poor capital allocation. Rather than a focus on reinvesting in this business and driving ancillary revenue streams around data, as RELX did, Wiley diworsified into adjacencies with weaker economics and competitive positions. A central pillar of the strategy is therefore to focus on where the group has competitive strengths, most notably in Research (journals), and divest non-core assets thus allow re-investment in a more concentrated collection of assets.

Segmental CFROI makes it clear this is a sensible strategy – lower return assets from Academic & Talent being divested:

The remaining businesses did 23% EBITDA margin in FY23 (April yr end) and did 23% in FY24 (having originally guided to trough at 20% which was upgraded to 21-22%), albeit this was boosted by an AI licensing deal (more below). The target is 24-25% in FY26. These are 73-74% GPM businesses so this should be eminently achievable (I forecast 26%). To give a sense of the upside potential, 23% EBITDA margin in FY24 came despite Research (2/3 of t/o) doing 31.8% margin compared to usual ~35%+, while some stranded central costs took corporate costs to 10% of sales vs typical 7.5-8.5%. Note that this does not include full impact of additional AI licensing agreements (upside discussed below).

Aiding this is $130m of cost out o/w half will be re-invested – laid out below. Note that alongside AI licensing, faster delivery of cost out was another reason for margins coming in ahead of expectations this year.

Management is talking increasingly confidently on earnings calls about the opportunity to push margins higher beyond ~25% in FY26. The new publishing ‘engine’ / platform will be fully online in 2025 and is expected to reduce the cost per article by ~20% (per CMD). It’s expected this will support higher market share (value to authors & customers + better throughput), improve gross margins as well as increase operating margins by removing certain duplicated or inefficient processes and infrastructure (e.g. $8m p.a. saving on technology costs). Peer review is the most timely / costly part of the process today, with a big opportunity to streamline this.

 IR’s comments were telling:

• “The gross margin opportunity is very significant.”
• "We are woefully inefficient.”
• “There is excitement there [about margin potential].”

The Research business historically achieved 35%+ EBITDA margin (I estimate 36.8% peak in FY16) and according to IR with the new Research platform there is “no question the margin should be higher than before.” Hindawi is running at 50% margins and there is a new Head of Ops in Research who has led similar margin improvement programmes at peers. I currently forecast 34% / 35% in FY26e/27e and 36% by F29e.

Robust and defensive core business

Over the medium-term mgmt. expects top line growth low-mid SD. The journals business has not historically shown material economic sensitivity – for example in 2008-10 OSG was +4% / +8% / +1% - while Learning has some counter-cyclicality built in (higher education enrolments typically go up when unemployment increases).

The Research Publishing business has a very long track record of ~3% OSG, and Research Solutions has consistently grown +8%. Learning is more of an unknown, but mgmt expects it to grow low SD.

R&D $ have consistently grown at 6-7% p.a. but this failed to convert to better than flattish growth in volumes and +1-2% pricing due to budgetary constraints at libraries, which ultimately caused the pressure to shift to OA (this dynamic is well covered in the Exane research notes). The journals industry has split into 3 models: Subscription, Insti OA (“read and publish” / R&P), and Gold OA. The key dynamic is that the volume of articles published has gone up > price inflation in subscriptions while the equivalent unit economics figure for OA (Article Processing Cost or APC) has consistently increased to the extent that the 2 are at parity now. So if the publishers can drive higher volume without reducing quality, at which they have generally been successful to date, the claim that they can achieve some operational leverage has merit given predominantly fixed cost base which doesn't differ whether OA or subscription model.

There is a credible argument put forward by Exane and industry experts that organic growth rates are increasing as the revenue mix shifts towards OA (with no negative implication for gross / operating margins). Submissions, i.e., the top of the funnel, were +15% in 2024, which incorporates some recovery from a Covid ‘negative lag’ but is indicative of a healthy underlying picture. Wiley and others only publish ~30% of the articles submitted, but in areas with high growth like India this is only ~10% acceptance at the moment. The expectation is that with the help of AI and the new research platform, this can unlock better volume growth.

Wiley has a structural advantage because it is the go-to in several industries which have a high volume of article submissions:

While the submissions and market share data provide evidence that the Hindawi quality control issues have had no knock-on or lasting effect on the balance of the journals business, where reputation remains intact (evidence from expert calls). Indeed, it has allowed Wiley to make its quality control screening best-in-class, with the benefit of improving AI tools. Wiley and incumbent peers appear to be winning back share as ‘OA native’ journals Frontiers and MDPI, which have faced similar quality control issues to Hindawi, go into freefall. Wiley have seen its share of OA articles fall from ~10% to ~7% in 2021.

Pulling this together with company guidance, my +4% CAGR for Research Publishing incorporates +25% / +20% for the next 2Y for Gold OA (guide: “at or above 20%” / current r/r ~30%) meaning Subs & Insti OA implied growth +1% (guide “moderate growth”). NB consensus expects ~4-5% growth for Informa (Taylor & Francis) and RELX (Elsevier). My OA Gold forecasts triangulate to ~$30m incremental revenues p.a.

Following the initial recovery phase, you have a ~10% EPS grower (~4% topline + margin accretion + interest down + buybacks) at high CFROI.

Highly cash generative model supports attractive shareholder returns

As a subscription business (48% recurring) it gets attractive 'float' through working capital (-30% WK to sales) so is highly cash generative at even low rates of growth. This is allied with relatively low capital intensity (u/l capex is much lower than headline D&A – see above). Normalised FCFe margins are in the teens and management targets $200m FCFe in FY26.

The cash generation has allowed Wiley to grow its DPS for 30 consecutive years and a ~4% DY helps underpin the downside scenario. I expect – and mgmt. has hinted – that with ND/EBITDA 1.9x at end FY2024 there is scope for buybacks, particularly with the share price where it is. I would anticipate incremental AI licences could effectively come back to shareholders given the high cash contribution (zero capex / 75%+ margin to WLY). The scale and timing of buybacks is also likely to depend on receipt of cash proceeds from disposals (see below). I currently have DPS growing +5% p.a. until divi payout ratio is back to ~33% then growing in line with EPS; buybacks $50m rising to $75m p.a. but clearly scope for more if my FCF estimates are correct ($218m in FY26 vs guide $200m and $250m in FY27).

AI offers underappreciated upside – can 2x FCF in short term

Management started to outline the AI opportunity in a bit more detail in 2H23 which aligns with my own view that this can be an under-the-radar AI winner (ownership of high quality data / info). Wiley has subsequently signed 2 licensing deals in 3Q and 4Q for $23m and $21m respectively.

Wiley’s (and the academic journal’s industry’s more broadly) AI-related opportunities are multi-faceted. AI is an important protection against quality control issues, as well as a tool to improve productivity & efficiency within the publishing process.

However, the clear & present opportunity which has emerged in concrete terms in the last 2Qs is monetisation of the high quality IP library Wiley possesses. $23m and $21m for limited time (3Y) / limited content (only 3Y+ old and certain titles from books business) gives you a sense of the value to LLM trainers – these are towards the top end of deals announced (see below). Wiley are clear that: (1) “all are going to need it” referring to businesses building out an AI platform, i.e. not just Mag 7, (2) “all of them are calling us”, (3) these companies may have the IP already but are both protecting against litigation on IP theft and trying to be a good corporate citizen. “The revolution versus the foundation of the internet is that IP is front and centre of the economy.”

In terms of the economics, 5-10 deals at $15-20m each has the potential to move the dial significantly in the near-term, as deals from the books typically flow through at ~75% to Wiley profits (author costs / royalties) while journals deals will flow through at a higher rate. Given recovered FCFe is guided to $200m and no deals beyond those announced are included in guidance, the upside is both clear and material (i.e., could feasibly double guidance).

Valuation

The risk / reward is unusually favourable today because the recent past has been troubled (and I believe some residual concerns remain relating to ‘blowback’ from Hindawi, which are misplaced), and the company is small enough ($2bn mkt cap) and only covered by 1 analyst (not well-known sell-side firm) for the AI angle to be underappreciated. The bull case below implies ~$200m revenue contribution from AI licensing deals; the bear case is akin to ~$160m FCFe vs mgmt. ~$200m target for 2Y time.

15x exit multiple and 2.7x sales are ahead of historic average multiples (~14x), but several bits of context are important:

• Re-rating is not required for an attractive margin of safety, but I believe is justified due to a better business mix and improving organic growth. FCY today is 10% in FY26e / 12% in FY27e on my numbers, with risk firmly skewed to the upside.
• Peers have re-rated meaningfully, e.g., RELX or Wolters Kluwer on 28-32x (see Appendix) or less extreme UK listed B2B info providers Informa and Wilmington 15-16x. Pearson, which operates in the part of the industry Wiley’s exiting, trades on 15x.
• McGraw-Hill and Houghton Mifflin were acquired in 2021-22 for 2.8x sales / 12x EBITDA and 2.6x sales / 10x EBITDA respectively. WLY currently trades on 5.5-6.5x FY1/FY2 EBITDA and the 2.7x sales scenario above equates to 10x EBITDA.

A DCF, with 9% WACC / 3% stage 2 growth / 2% terminal growth shows 50% upside.

One complexity within the valuation currently is how to account for the non-core asset disposals. The table below from IR is helpful. There is no firm timeline on cash receipt but in the meantime Wiley shareholders receive 8-10% interest from PIK notes (ratcheting up), plus a 10% stake in the combined entity for the University Services business:

At the point of valuation above, the PIK notes are included in the EV (while interest is included in P&L / FCFe it does not impact NOPAT / FCFf) and I then assume these convert to cash in FY29e:

Timing the entry point

Management is executing ahead of plan, guidance has been raised twice already, and the current set up is skewed very attractively because (1) underlying margin improvement is now assumed to be limited this year and (2) no further AI licensing agreements are included in guidance for FY25e but are highly likely.

Restructuring (the ‘Value Creation Plan’ / VCP) is running ahead of schedule, which has supported an accelerated margin improvement / higher trough (23% vs 20% originally expected). Although management has only set targets relating to margins for FY24 through FY26, it is clear from the tone on the earnings call that they are confident of delivering a multi-year margin improvement (see above).

The entry point here, as the market starts to understand that the underlying earning power is not simply the 10Y average margins, with meaningful upside from AI licensing, is optimal.

Elsewhere, the Learning low single-digit growth is below current run-rates and the positive commentary around lead-indicators such as higher education enrolment are notable.

New CEO bought shares on arrival (>$1m). There have been some recent director sales but I don’t have any further information on these beyond usual platitudes from IR.

Catalyst

• Further AI deals leading to guidance upgrades
• Evidence of recovery in revenue growth & margins within Research
• FCF above expectations (capex and restructuring look padded in guidance)