As a pre-employed kid living at home, I spend a lot of time on Instagram Reels. Recently, I came across The School of Hard Knocks, where a guest mentioned that those who supplied shovels during the gold rush made more money than the miners. Being an avid ChatGPT user and wary of investments related to Taiwan, I’ve been subconsciously searching for an AI supplier. During a Warrior Stock screen today, John Wiley & Sons (WLY) caught my attention. It turns out WLY might be the opportunity I’ve been seeking.
John Wiley & Sons (WLY) – Turnaround
Key Financials (as of 7/8/2024)
- Market Cap: $2,335 mm
- Enterprise Value: $3,139 mm
- Forward EV/EBITDA: 7.8x
- LTM Normalized P/E: 22x
- Current Stock Price: $43.30
- HQ: Hoboken, NJ
The Pitch
John Wiley & Sons is undergoing a transformation as a traditional publisher to a digital leader in academic and professional publishing. Leveraging its 200-year legacy, Wiley is focusing on high-growth end markets such as open access research and generative AI training solutions. Recent divestitures of non-core assets, combined with strategic investments in digital platforms position the company for sustainable profitability and innovation.
With a substantial portion of revenue now coming from digital and online products, Wiley’s business model and forward-thinking strategies make it a compelling. The company is well-positioned to capitalize on emerging trends in the publishing industry, offering a unique blend of stability and advancement. As the demand for digital content and AI applications continues to grow, Wiley’s strategic initiatives are set to drive significant future value and create a back door exposure to the artificial intelligence narrative.
Business Model: Publishing
John Wiley & Sons Model Overview
John Wiley & Sons (“WLY,” “Wiley,” or “the Company”) is one of the leading worldwide research publishers. After the divestiture of several non-core businesses, Wiley’s two segments surround ‘research publishing and solutions’ and ‘academic and professional reporting’.
- Value Proposition: Research publication services and sells textbooks, 200 year old library
- Markets: Academia and Professionals
- Sales: Direct sales representatives, one-time and subscription revenue
- Execution: Digital and physical delivery
- Financing: Profitable and strong financial health, High SG&A costs
Value Proposition
Wiley’s business aligns closely with rising global investment in research and development (R&D), the shift to open research, and the application of new knowledge to real-world problems. The Company focuses on increasing publishing output to meet global demand for peer-reviewed research and expanding platform and service offerings for corporations and societies. Its learning strategies involve scaling high-value digital content, courseware, and assessments selectively.
Reportable Segments
Research
Wiley offers peer-reviewed publications in the scientific, technical, and medical (STM) fields, along with content platforms and associated services, catering to academic, corporate, and government clients, academic societies, and individual researchers.
- Research Publishing:
Pay to Read, Read and Publish, and Publish services –
As of April 30, 2024, WLY published over 1,900 academic research journals, with subscriptions sold worldwide through various channels, including direct sales, independent agents, and professional society memberships. Approximately 53% of the journal subscription revenue comes from Wiley-owned publishing rights, while 47% is from long-term alliances with professional societies and other partners.
Wiley’s online platform, Wiley Online Library, enhances accessibility and discoverability, supporting new revenue opportunities through applications, advertising, and pay-per-view options.
WLY’s Open Access business model, which includes Hybrid and Gold Open Access Journals, allows for immediate free online access to research articles, supporting the needs of researchers and funders.
The Company remains a top performer in Clarivate Analytics’ Journal Citation Reports, with significant contributions to citations and category rankings. - Research Solutions:
WLY’s platform and workflow solutions include production and content hosting, submissions and peer review support, and editorial and copyediting services. Its online platform, Literatum, offers access to over 10 million articles, 28,000 online books, and numerous reference works from approximately 2,100 publishers and societies
For the year ending April 30, 2024, Wiley’s research revenue constituted approximately 56% of its consolidated revenue, with an Adjusted EBITDA margin of 31.8%. Nearly 96% of this research revenue was derived from digital and online products and services.
Learning
Wiley delivers scientific, professional, and educational print and digital books, as well as digital courseware, to libraries, corporations, students, professionals, and researchers. Additionally, the Company offers assessment services to businesses and professionals.
- Academic:
Print and Digital Publishing –
WLY sells educational textbooks, supplementary materials, and digital products primarily to bookstores, online retailers, and directly to students at both for-profit and nonprofit educational institutions, including colleges and universities. The Company’s sales representatives work with faculty and bookstores to select and supply course materials, with peak sales seasons occurring from July to October and December to February.
Wiley’s content development focuses on digital formats, improving efficiency and enabling print-on-demand delivery. The digital content is available on platforms like Wiley Online Library, WileyPLUS, zyBooks, and alta, and is sold through intermediaries like Amazon, Apple, and Google. - Professional:
Print and Digital Publishing –
Wiley sells professional books, including business and finance, technology, professional development for educators, and other categories, as well as the Dummies brand, to both brick-and-mortar and online retailers, wholesalers, college bookstores, individual practitioners, corporations, and government agencies. Its sales representatives work globally with independent bookstores, national and regional chains, wholesalers, and corporations. Professional book sales are also driven by direct marketing, conferences, and industry-specific outreach.
Additionally, Wiley has active custom publishing programs, creating tailored digital and print books for professional organizations. These custom publications often feature personalized cover art and content, including the popular For Dummies series, to meet the unique needs of various organizations worldwide.
In the fiscal year ending April 30, 2024, Wiley’s Learning segment contributed around 31% to its consolidated revenue, achieving a 34.9% Adjusted EBITDA margin. About 59% of this revenue came from digital and online products and services.
Summary: Research publication services and sells textbooks, 200 year old library
Market
Wiley’s operations are primarily based in the US, UK, India, Sri Lanka, and Germany. For the year ending April 30, 2024, approximately 47% of its consolidated revenue came from outside the US.
Research and Learning customers encompass academic, corporate, government, and public libraries, research funders, researchers, scientists, clinicians, engineers and technologists, scholarly and professional societies, as well as students and professors.
Summary: Academia and Professionals
Sales
Products are sold and distributed worldwide through various channels, such as research libraries and library consortia, independent subscription agents, direct sales to professional society members, and other customers. Key publishing centers are located in Australia, China, Germany, India, the UK, and the US.
Summary: Direct sales representatives, one-time and subscription revenue
Execution
Growth Strategies
Wiley’s key growth strategies for the Research segment include developing new licensing models for institutional customers (“pay to read and publish”), creating new open access journals and revenue streams (“pay to publish”), focusing on high-growth and emerging markets, and developing new digital products, services, and workflow solutions for researchers, authors, societies, and corporate customers.
For the Learning business, strategies include selectively scaling high-value digital content, courseware, and assessments where there is opportunity. Wiley also focuses on managing the decline in print revenue while driving growth in digital business lines.
Education Materials
Wiley sources book materials from authors globally, utilizing internal and external editorial support and advisory boards. Content is typically authored directly or commissioned by editors. Agreements with authors detail publication terms, copyright, and royalties. Compensation includes royalties and work-for-hire arrangements, with some authors receiving advance payments, which are reviewed for recoverability.
The Company regularly updates its catalog by adding new titles, revising existing ones, and discontinuing others. The Company creates market-specific adaptations based on demand and typically revise textbooks every 3-5 years, with more frequent updates for subscription-based products.
WLY contracts independent printers and binderies worldwide, using various suppliers and materials. It has an agreement with Cengage Learning to outsource US-based book distribution, aiming for improved efficiency and a variable cost model. As of April 30, 2024, Wiley operated one global warehousing and distribution facility in the UK. Learning book sales are typically returnable with certain restrictions, and the Company estimates future returns based on historical data and market trends.
Summary: Digital and physical delivery
Financing
With plans to divest several services, some financial health indicators could be affected. The Held for Sale or Sold segment represented 13% of consolidated revenue in the last fiscal year. Although meaningful, we will estimate a -15% change in some EBITDA figures, providing an added margin of safety.
Positive Free Cash Flow
The Company has consistent gross margins (~70%) and EBITDA margins (~15.5%), which leads to consistent positive FCF (SG&A takes up a bulk of the operating expenses: ~55%).
Debt
Financial health (from FQ4/CQ1):
- 0.5x Current Ratio
- 0.4x Quick Ratio
- 119.9% Debt/Equity
- 1.6x Net Debt/EBITDA
A low current ratio could be worrisome for capital-intensive companies. For WLY, the >1x current ratio is influenced by subscription-based accounting. More than half of their current liabilities consist of unearned revenue, as it collects cash from subscription sales upfront but still owes products or services.
It might be preferable to have a lower Debt/Equity ratio, but Wiley is a profitable company that can sustainably manage its debt. We should not have to incorporate bankruptcy risk into our bear case.
Equity
Summary: Profitable and strong financial health, High SG&A costs
Wiley History
When Charles Wiley opened a small printing shop in 1807, a leader in research publishing was born.
Timeline
- 1814 – Wiley becomes a publisher
- 1826 – John Wiley takes over the family business
- 1836 – Reaches prominence: publishing Edgar Allan Poe, Hans Christian Andersen, Victor Hugo, Charles Dickens, and Elizabeth Barrett Browning
- 1865 and 1876 – John’s sons Charles and William join the business forming John Wiley & Sons
- 1960 – Wiley opens first international subsidiary in London
- 1962 – First public offering of Wiley stock
- 1979 – Andrew Neilly becomes CEO as the first non-Wiley to lead the business
(Jesse Wiley serves as Non-Executive Chairman today) - 1995-2007 – Wiley expands through acquisition and transitions into the business model we see today
See more dates here: 200 Years of John Wiley and Sons
Recent Divestitures
Brian Napack, Wiley’s president and CEO from December 2017 to October 2023, and Wiley’s executive leadership developed a strategic plan to focus on the most profitable businesses and divest non-core assets. Given Matthew Kissner’s extensive experience with Wiley and the markets, he was entrusted to drive execution during this transition period as the new CEO.
- On June 1, 2023, Wiley’s Board of Directors approved a plan to divest certain non-core businesses
- The businesses identified for divestiture are University Services, Wiley Edge, and CrossKnowledge
- Completed University Services sale January 2024
- Completed Wiley Edge sale May 2024
- Completed CrossKnowledge sale expected by Q2 FY2025
As a result of the divestitures, the Company could end up with an adjusted EBITDA margin between the low to mid 20s compared to mid-teens.
Summary: Been a family business for over 200 years and currently transitioning
Wiley Management
CEO – Matthew Kissner
As previously mentioned, Matthew Kissner was named Interim President and CEO of Wiley in October 2023 after a 20-year history at Wiley in various leadership, board, and consulting roles, even previously as Interim CEO in 2017. His extensive experience includes leadership positions at Pitney Bowes, Bankers Trust, Citibank, and Morgan Stanley, as well as a private equity operating partner role.
Since taking over as CEO, he has successfully sold off the non-core assets.
In addition to guiding the Company through transition, the Board and Matt will be developing the next generation of Wiley leadership.
Kissner holds a Bachelor of Science in Education and a Master of Business Administration from New York University and is a member of the Board Executive Committee of the Regional Plan Association.
Summary: Recent CEO change but could have been for the better
Critical Factors
Generative AI refers to a type of artificial intelligence that can create new content, such as text, images, or music, by learning patterns and structures from existing data. It uses models like neural networks to generate outputs that resemble human-made creations. This technology is widely used in applications ranging from content creation to advanced problem-solving.
ChatGPT
Outperformance
GenAI end market
Generative AI requires training much like students do. Due to copyright and privacy concerns, publishers and content providers must license their data and regulate how a large language model (LLM) uses it.
To date, Wiley has closed two content rights projects for large tech companies and reports increasing demand. These projects will generate a combined revenue of $44 million, with the second project’s revenue recognized in FY2025 (CY2024). Although this combined revenue may be less than 5% of LTM adjusted revenue, it marks only the beginning. Both projects are time-limited but can be extended while Wiley can continue to find other licensees.
In addition to licensing, Wiley aims to develop new business models to leverage its 200 years of published content. For instance, envision a ChatGPT tailored specifically for pharmacists or financial analysts using Wiley’s vast datasets.
The market for leading tech providers with extra cash for experimental licensing contracts with Wiley is limited. However, as the GenAI industry matures, Wiley’s AI training could become a market necessity. Moreover, Wiley’s content is continually updated, including textbooks, suggesting these transactions may lead to recurring revenue rather than one-time sales.
The AI use case is incredibly synergistic with the Company’s core research and learning services.
Pessimistic Expectations
Since the opportunity is still in its early stages, analysts estimate only 3% YOY revenue growth for FY2025 and 2% for FY2026. New AI projects announced for FY2025 or FY2026 are likely to bring positive momentum to the stock, as analysts have not yet factored the opportunity’s size or timing into future earnings estimates.
Moreover, there are other potentially more exciting options for artificial intelligence exposure, such as NVDA, TSM, and AMD. Despite Wiley being up 42% year-to-date, it is trading at 7.9x forward EBITDA and 12.6x forward earnings, which does not seem overly optimistic (incredibly cheap compared to the mentioned AI exposures).
Throwing darts at the wall: If Wiley’s GenAI annual revenue reaches 10% of total revenues ($150-200 million) by FY2026 or 2027, with 7-10 projects per year, the company will emerge as a success story.
A Company Going Through Changes
As value investors, we seek established companies undergoing transitions, often taking 2-5 years. These situations allow us to track their progress over time, especially with well-known equities. Turnarounds are ideal for value investors, presenting opportunities to invest at inflections with a clear path to generating returns.
When Wiley first announced its Value Creation Plan (divestitures and streamlining), the stock experienced a pullback (see the first column in the graph below). I wish I had been tracking Wiley at that time. However, I hadn’t yet read Peter Lynch’s One Up on Wall Street, where he emphasizes investing in companies that focus their operations rather than diversifying aimlessly. Because of this, I may not have been prudent enough to recognize the opportunity. A historic company like Wiley making fundamental changes should have interested many investors.
Moreover, there could be reasonable upside in adjusted-EBITDA margins from a heightened focus on business efficiency.
Risks
- Duration: If the GenAI initiative takes too long to proliferate, the stock could exhibit value trap tendencies while there are other opportunities for AI exposure. However, the Value Creation Plan turnaround story remains intact. There is potential that the benefits of this turnaround are already reflected in the stock, given the successful divestitures and recent run up in share price.
- Regulation: The AI industry may face a slowdown due to government interference, driven by ethical debates and national security concerns surrounding AI development. However, given Wiley’s focus on academic and professional sectors, this risk could be mitigated.
- Content Relevance: Maintaining the relevance and quality of their extensive content library is crucial. Outdated or inaccurate information could damage their reputation and lead to a loss of customers and GenAI demand.
Investment Summary
Wiley is a turnaround story played out that Wall Street projects to be a slow grower. However, the potential use case for its research library to train large language models could quickly transform the company into a medium to fast grower, depending on the demand for its content. Given the uncertainty, the GenAI story remains ongoing and interesting, especially as a 200-year-old company cleans up its business model.
An Extra Thought on the Way Out: Mark Cuban
All this talk about artificial intelligence and the need for scientific training reminds me of a Mark Cuban interview I saw a few years ago. In 2017, he suggested that in 10 years there might be a greater demand for Liberal Arts majors than programmers. I’d build on his point and say it’s not just going to be “free thinkers” but discoverers. What will Large Language Models need once they’ve learned all existing information? New information. Does this mean there will be a renaissance in the sciences? Maybe, maybe not, but there will be more demand for research.
Even if you’re not interested in Wiley or artificial intelligence, it’s important to envision what life and the economy will look like when AI inevitably becomes a bigger part of our livelihoods.
Continue the Research
There is a reason why the GenAI story may not be fully priced into the stock yet: it requires more research than I’ve conducted. Remember, Achaion.com posts are meant to help start the research process. The rest is always up to you and your ability to think.
Get started
If you have more questions or want to talk all things WLY, do not hesitate to reach out on X, instagram, or shoot me a text.
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
The opinions and statements contained in the writing in this post do not constitute an offer, a solicitation, or a recommendation to enact or decrease an investment or to make any other transaction. It should not be the cause for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Achaion.com and has not had any outside input. Read more about Achiaon.com’s Disclosures and Privacy Policy.
Glossary
- Adjusted–EBITDA: A measure of a company’s operating profitability, calculated as EBITDA, adjusted for one-time or non-recurring items
- Backfile License: A one-time fee paid to access a historical collection of journal articles or books
- Calendar Year (CY): The period of time from January 1 to December 31
- Journal Citation Reports (JCR): A widely used source of citation metrics to analyze the performance and impact of peer-reviewed journals
- Deferred Revenue (Unearned Revenue): Money received by a company for products or services not yet delivered or performed
- Fiscal Year (FY): A one-year period that companies use for financial reporting and budgeting, which may not align with the calendar year
- Forward Earnings: Projected earnings of a company over the next twelve months, often used to evaluate future financial performance
- GenAI: Generative Artificial Intelligence, a type of AI that can create new content by learning from existing data
- Hybrid Open Access: A publishing model where authors can choose to make individual articles openly accessible within subscription-based journals
- LTM (Last Twelve Months): A financial metric that indicates the performance or revenue generated over the past twelve months
- Open Access (OA): A publishing model where research articles are made freely accessible to the public, typically funded by authors or their institutions through Article Processing Charges (APCs)
- Pay-to-Read and Publish: Licensing models where institutions pay for access to read content and for their researchers to publish in journals
- SG&A (Selling, General, and Administrative Expenses): Operating expenses that are not directly tied to the production of goods or services, including marketing, salaries, rent, and utilities
- Transformational Agreements: Contracts that blend traditional subscription access with open access publishing, often involving recurring revenue over multiple years
