John Wiley & Sons, Inc. (WLY) Q2 2023 Earnings Call Transcript

John Wiley & Sons, Inc. (NYSE:WLY) Q2 2023 Earnings Conference Call December 7, 2022 10:00 AM ET

Company Participants

Brian Campbell – VP, IR

Brian Napack – President and CEO

Christina Van Tassell – EVP and CFO

Conference Call Participants

Peter Lukas – CJS Securities

Operator

Good morning and welcome to Wiley’s Q2 Fiscal 2023 Earnings Call. As a reminder this conference is being recorded. At this time, I would like to introduce Wiley’s Vice President of Investor Relations, Brian Campbell. Please go ahead.

Brian Campbell

Thank you, and hello everyone. With me are Brian Napack, Wiley’s President and CEO; and Christina Van Tassell, Executive Vice President and CFO.

A few reminders to start. 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.

Also, Wiley provides non-GAAP measures as a supplement to evaluate underlying operating profitability and performance trends. These measures do not have standardized meanings prescribed by U.S. GAAP and therefore, may not be comparable to similar measures used by other companies, nor should they be viewed as alternatives to measures under GAAP. Unless otherwise noted, we will refer to non-GAAP metrics on the call, and variances are on a year-over-year basis and will exclude the impact of currency. After the call, a copy of the presentation and a transcript and a playback of the webcast will be available on our Investor Relations web page at investors.wiley.com. I’ll now turn the call over to Brian Napack.

Brian Napack

Good morning everyone. Thanks for joining us. As I often do I will start by pointing to Wiley’s mission which is to unlock human potential and do so by powering scientific research and career connected education. This is far more than just a statement, it is our purpose, our culture, and our differentiator. Through many cycles and periods of disruption, the Wiley brand has helped us to win and retain customers, authors, and partners. And together with them we have promoted science, growth, and social progress for more than 200 years.

The Wiley team accomplished a lot in the second quarter. This is both despite and in response to a challenging economic environment. We have seen a confluence of headwinds, these include decade high inflation, low consumer confidence, a tight job market, rising interest rates, FX volatility, and ongoing geopolitical disruption. These pressures have caused a pullback in consumer spending that is effective about consumer facing and enrollment dependent businesses. And this has impacted our revenue performance for the quarter and our growth expectations for the year. Christina will speak to that later in the call.

Despite all this, our core growth engines of research publishing, research solutions, and corporate talent development remains strong and they are performing well. Research has a solid growth trajectory, consistent margins, and a recession tolerant profile. It continues to be supported by ever increasing R&D spending worldwide that drives up publishing volume and the demand for Wiley’s research content and solutions. Since 2000, global R&D has more than tripled to $2.4 trillion. This spending growth has persisted through multiple recessions.

Corporate talent development is now a major growth driver for Wiley, driven by the success of our unique education services that help corporations to fill their big talent gaps rapidly and reliably. That said, earnings were down this quarter due to revenue challenges in academic and professional learning, along with ongoing investment in our core growth areas, most notably research. To mitigate these revenue challenges, we’ve accelerated our cost reduction program, including implementing targeted workforce actions, the general hiring freeze, real estate consolidation, and disciplined expense management.

Our important work to simplify and optimize Wiley is moving forward steadily. As part of this, we continue to streamline our structure to better align with our customers and their needs and this is helping us to drive greater impact, synergy, and efficiency. You will recall that last quarter we reorganized our research segment into publishing and solutions to great effect. Now we are reorganizing education lines of business into two new customer centric segments to achieve similar goals, namely to align tightly with Wiley’s two primary target markets in education, universities and employers. I’ll talk about this a bit more later in the presentation.

Let’s look at our Q2 performance. As always, all variances exclude currency impacts. Wiley’s revenue for the quarter grew 1%, but it was down slightly on an organic basis. Growth and open research, research solutions, corporate talent development, and corporate training offset declines in APL’s publishing lines and in university services.

Adjusted EBITDA declined by 4%, which is in line with our expectations for the quarter. The decline is attributed to the soft APL revenue performance combined with our planned investments to scale both research publishing and research solutions. Our adjusted EBITDA margin of 24% came in slightly ahead of prior year. Christina will take you through our segment performance in more detail. Adjusted EPS declined 13% due to the adjusted EBITDA performance and to $5 million of additional interest expense compared to prior year, a result of the current rate environment.

As you know, we hold ourselves accountable for achieving our commitments. In research, we said we would do four things in fiscal 2023. One, publish more to meet global demand and drive revenue. Two, establish more transformational agreements. Three, scale our research solutions. And four, streamline our workflows to increase both revenue and profitability. I’m pleased to say that we’re making good progress on all fronts. And publishing more we grew article submissions this quarter by 6%, although publishing output rose only 1% due to variances in publication timing. Open research continues to be a strong driver of growth for us, with OA article output up by double digits.

We continue to make good progress in the market on transformational agreements, recently renewing our landmark countrywide agreement in Germany. This multiyear renewal is significant and that it validates our model and our long-term customer centered approach. The new deal gives research authors in Germany even more publishing options, with an additional 240 journals integrated into the new contract. To date, Wiley has signed over 40 agreements representing over 2000 institutions spanning 23 countries.

The deal pipeline remains very strong, particularly in the U.S. and Europe. In the U.S., these important agreements will allow our customers now to comply with the new White House guidance on federally funded research. As a reminder, the U.S. Office of Science and Technology policy or the OSTP, issued guidance in August calling for all new federally funded research to be open and freely available starting in 2026. As you know, this direction is fully aligned with our strategy and supported by our strong momentum in open research.

In research solutions, we continue to see strong momentum. We signed 18 new research solutions partners in the quarter, including Project Hope, a renowned global health and humanitarian relief organization. We also executed several product launches, including the Career Center for the American College of Emergency Physicians.

As expected, cross sell and upsell opportunities are accelerating within our network of 900 society and corporate partners. We expanded nine partnerships with additional services, including our multifaceted partnership with the AAAS, the world’s largest scientific society. We now provide them with editorial services, distribute their journal content through our platform, and manage their important job board, which is appropriately called Science Careers. Wiley now powers the recruitment sites of four of the world’s most significant scientific organizations. Two of them are also primary publishing competitors, demonstrating the power of Wiley’s ecosystem approach.

I recently attended the Frankfurt Book Fair, the most important industry event for the research publishing community. While there, I met with lots of prospective customers and industry stakeholders. Got to say that the buzz around Wiley and our solution strategy is incredible. After the event, one prominent industry pundit summed it up perfectly writing this, “Wiley is taking a bold stance with this new division, investing in the collaborative solutions that will help the industry successfully navigate the transformations necessary in open research. It is likely to be a good move for Wiley, helping to extend its customer base, diversify revenue streams, grow revenue through facilitating upselling, and sustain its partnerships across the publishing supply chain. Wiley will enjoy access to volumes of data about publishing and research trends, which could open up new product or business opportunities, as well as greater strategic advantage.” That pretty much says it all.

Finally, we continue to drive increasing automation, intelligence, and efficiency across the research publishing process and our investment is paying off. For example, the intelligence systems we are implementing are allowing the proportion of submitted articles kept in the Wiley universe to continue to rise. Year-to-date, 66% of rejected authors were offered another Wiley Journal option, up from 52% the prior year period, and 33% in fiscal 2021. These efforts will pay off with incremental revenue growth and strong margin contribution over time. So Q2 was another solid quarter of execution in research.

Now let’s turn to our commitments and career connected education. At the beginning of the year, we said we were going to expand our corporate and university client base, drive growth in our differentiated courseware offerings, and gain operating efficiency. On growing the customer base, we’re making good progress. Wiley signed another six large corporate clients and talent development during the quarter. These included multinationals in technology, healthcare, financial services, and consumer staples. The client pipeline remained strong and we are seeing double-digit growth in employee placement. Of course, we are monitoring the labor market very closely given the current economic uncertainty, but so far demand for our talent development remains robust across both existing and new clients. It’s important to note that there remain over 300,000 open tech jobs in the U.S., even higher than it was before the pandemic.

Wiley also continues to be the go-to partner in university services. We signed four new partnerships this quarter: Cal State San Marcos, the University of the Sunshine Coast in Australia, Bay Path University in Massachusetts, and Bernau University in Georgia. Within our existing partner base, we added nine new degree programs for a total of 56 new programs year-to-date. These new programs are underlying drivers of our future growth. So while enrollment remains a cyclical headwind, we continue to see consistent institutional demand for Wiley’s value-added services.

Let me say a few words about enrollment and its drivers. Despite the softening economy, we’re still seeing a very strong labor market. Consequently, many would be students are being drawn directly into jobs instead of preparing for their careers with education. We expect this to unwind as the economy slows, but there is historically a 12 to 18-month lag between the start of a recession and the material uptick in university enrollment. In any case, our focus now of course, is on helping our university partners to compete in this challenging moment while also preparing them to win as the cycle turns back in their favor.

Wiley, of course, continues to deliver differentiated courses and courseware for learners. Our STEM-focused courseware called zyBooks saw a growth of 27% this quarter. This is a great example of how we win despite market challenges. We delivered great products in high potential disciplines. During the quarter, we launched our first courseware solution in data science, a rapidly growing career-connected subject. We also won an important adoption with the Virginia Community College and we expanded our institutional relationships with three of the largest online universities in the United States.

Finally, on the efficiency front. We’re actively reorganizing and rightsizing the APL publishing lines to reflect market realities and improve their profile. Among other things, we are reducing overhead, focusing our development efforts, outsourcing lower value editorial activities, and modernizing our go-to-market approaches. And in talent development, which is in rapid growth phase, we are driving towards meaningful profit contribution by automating and reengineering our processes as we scale the business.

So overall in education, we continue to execute on our fiscal 2023 commitments despite the economic and market headwinds. We continue to drive real-world impact at Wiley through our core business activities in research and education while making progress on our commitment to the UN sustainable development goals. We remain focused on three of the UN SDGs, quality education, reducing inequities, and climate action.

In Career Connected Education, we are actively expanding access to high-quality education and gainful employment and thus, we are working to reduce inequities. In fact, 60% of our IT placement candidates globally now come from underrepresented population. This is well ahead of our target. And as a leading scientific publisher, we published, for example, over 100 journals related specifically to climate science.

Wiley is committed to being carbon net zero by 2040, aligning to the critical climate goal of preventing the global temperature from increasing beyond 1.5 degrees. This critical goal is in line with both the science-based targets initiative and the Paris agreement. In addition, Wiley continues to be recognized for our ESG progress and risk profile, achieving strong scores from Sustainalytics, S&P, ISS and MSCI. Hats off to all of our Wiley colleagues for their dedication to and support for our ongoing impact journey. I’ll now pass the call over to Cristina to take you through our segment results, cost measures, and outlook.

Christina Van Tassell

Thank you, Brian, and hello, everyone. Although we’re navigating through a challenging economic environment, our core research remains strong with healthy profit margins in a recession tolerant industry. We remain bullish on our opportunities there to expand and scale our publishing and solutions offerings.

In our academic line, we’re tackling our cost structure to align with current market realities, which are both cyclical and secular in nature. Talent development continues to grow nicely as we extend into new industry verticals and new regions. We’re investing there to grow our client base while driving towards meaningful profit contributions in the future. In research, as Brian noted, we continue to drive strong momentum as we invest to publish more high-quality research and do it more efficiently. We’ve also set our sights on scaling solutions offerings such as content platforms, OA publishing, and other revenue-generating services to help support the industry transition to open research.

The team spent considerable time out in the market in Q2 and the feedback from both current and potential customers is that they’re focused on the changing economic and policy landscape and they need help in the OA transition. The recent OSTP guidance only confirms our solution strategy here, and we believe we are well situated to seize that opportunity. Research revenue for the quarter was up 3% or 2% organically. Research publishing revenue rose 2%, driven by continued growth in Open Access with OA article output of 34% over prior year.

Research Solutions revenue was up 11%, driven by recent acquisitions and modest organic growth from platform services and career centers. As Brian noted, we continue to make terrific progress in adding new solutions partners, including 18 logos this quarter as well as upselling existing ones. To give you a sense of the upsell opportunity, only around 15% of our current solution partners subscribed to more than one service and roughly only 5% subscribed to more than three. Given the expanding pipeline of publishers, societies and corporations, we recently increased this investment case in the space.

A quick note on research integrity. In Q2, we attracted a small number of articles due to an investigation into viewer activity in selected OA journals. We are constantly scrutinizing our publishing process to ensure the quality of our content. Our industry continues to work very closely together to ensure the peer review process, which underpins the knowledge in the industry.

Adjusted EBITDA in research declined 4%, primarily due to investments to expand our editorial capabilities to manage increasing publishing volumes and to scale our solutions offerings to meet partner demand. Our adjusted EBITDA margin was 36% for the quarter, on par with prior year. Year-to-date, revenue was up 3% and adjusted EBITDA was down 7%. We expect improvement in the second half on both revenue and profit driven by open research and solutions growth as well as lower expenses.

Now on to APL. The current economic environment is particularly challenging for higher Ed course material and professional books, given the pullback in consumer discretionary spending and cyclical enrollment headwinds. Note that U.S. enrollment this fall was down 1% after being down nearly 5% in the spring and 3% last fall. APL revenue for the quarter was down 10%, driven by a 10% decline in Ed Publishing and an 11% decline in professional learning. Ed Publishing saw double-digit print declines offsetting growth in digital content and courseware.

In addition to inventory reductions across our channels, we also saw soft consumer demand. On a more positive note, as Brian noted, zyBooks Digital Courseware continues to grow nicely and we see strong institutional demand. During the quarter, we expanded our zyBooks partnerships with Southern New Hampshire University, Western Governors University, and Arizona State Online.

In our Professional Learning lines, declines in Professional Publishing offset continued double-digit growth in Corporate Training. In our Professional Publishing lines, which includes books for business, finance, and tech professionals, we are seeing both inventory reductions and slowdown in consumer demand. The bright spot here is our virtual and in-person corporate training services, which continued to see strong growth as companies invest in leadership and team development.

Adjusted EBITDA on APL was down 12% this quarter, mainly due to the revenue declines in our publishing lines, offsetting expense savings. Our adjusted EBITDA margin is 33% for the quarter, which is consistent with prior year. Year-to-date, revenue was down 6% and adjusted EBITDA was down 18%. As a reminder, we are adjusting our cost structure to align with market conditions with the restructuring savings to materialize in the later part of the year.

Now for Education Services, which saw overall revenue growth of 17% or 13% organically. This is driven by talent development revenue growth of 61%. As Brian mentioned, we added six new multinational corporate clients this quarter. We’re rapidly growing our tech employee placements, up over 60% compared to prior year, and we continue to expand into new regions with strong placement growth in Eastern Europe and India. University Services revenue declined 1% or 6% organically, driven by ongoing cyclical enrollment headwinds and lower revenue share in our long-term renewals.

As we discussed last quarter, we continue to work with our strategic partners to ensure long-term, mutually beneficial relationships. For some, this means a narrow service bundle at a reduced share of revenue to Wiley. While this will weigh a bit on our revenue performance over the intermediate term, it builds healthy relationships, and we’re optimizing our offerings and cost structures to ensure a healthy return.

Some institutions will continue to refer an upfront fee-for-service model, which will allow us to remain flexible in our business model to ensure good commercial outcomes. Adjusted EBITDA was up 69% driven by the revenue flow through in talent development and the timing of expenses in University Services. Some of it related to Hurricane Ida and some of it from year-over-year swings in marketing and advertising costs. Our adjusted EBITDA margin is 17% for the quarter compared to 12% in the prior year period. Year-to-date, Ed services revenue was up 14%, while adjusted EBITDA was down 14%, mainly due to revenue performance in University Services and investment to expand client relationships and talent development.

Historically speaking, Wiley has held up well through difficult economic periods because of the nature of our businesses. First, scientific research is vital to economic progress, and therefore, spending on it continues through the cycles. Second, while we’re currently working through unusual enrollment challenges, the education sector tends to be countercyclical with people going back to school in times of market contraction. Nonetheless, the current environment calls for us to not only be prudent but to act decisively and drive cost savings and efficiency gains while investing in our core growth areas.

We recorded a $14 million restructuring charge in Q2 stemming from a targeted workforce reduction and real estate optimization on top of the $22 million we recorded in Q1. We anticipate these actions to generate targeted run rate savings of approximately $50 million. $29 million of savings is expected this fiscal year and is reflected in our 2023 outlook. The vast majority of these savings materialize in the back half of the year. We’ve implemented a hiring and travel freeze to mitigate first half revenue performance, and we’re making steady progress in our broader simplification and optimization efforts. We continue to consolidate our office footprint with a 32% office space reduction since spring of 2020. This is up from 28% at the end of last quarter and 18% at the end of last year.

We are also in the process of closing our technology development and APL content management center in Russia. It has been one of several Wiley tech centers around the world, and we have comprehensive migration plans underway. I’ll update you on this and other Q3 savings initiatives when we get to March. Our process of simplification and optimization is a major focus that will yield increasing benefits in the quarters and years to come. We will keep you posted on our plans and progress as we move forward.

Free cash flow year-to-date was a use of $126 million on par with prior year with lower cash earnings offset by lower incentive compensation payments for our fiscal 2022 performance. As a reminder, our cash flow is normally a use for the first half of the year due to the timing of collections for general subscriptions. CAPEX was $50 million for the half, essentially in line with prior year, and there were no acquisitions of note.

We remain opportunistic on the acquisition front as we look to add scale and capabilities in research and corporate talent developments. At the end of October, we had $118 million in cash on hand and undrawn revolving credit available of $464 million. Also note, we recently amended our revolving credit agreement to extend more than $1.3 billion in credit capacity through November 2027 with approximately $200 million in existing credit commitments to remain through the current maturity date of May 2024.

Our current credit facility size remains at $1.5 billion. Net debt-to-EBITDA ratio was 2.1 at the end of October compared to 2.0 in the prior year. Finally, we allocated $56 million year-to-date to dividends and share repurchases on par with prior year. Our current dividend yield is around 3% and we acquired 382,000 shares at an average cost of $45.84 per share. Total spend on repurchases was around $17 million, in line with prior year. In summary, our strong balance sheet, consistency of annual cash flows, and ample liquidity gives us the flexibility to continue to invest in our core and return cash to shareholders.

Let’s review our full year outlook. Due to the market-related headwinds in education, we are reducing our revenue guidance at constant currency from mid-single-digit growth to low single-digit growth. Revenue growth continues to be driven by solid performance in Research and Corporate Talent development. We are reaffirming adjusted EBITDA at constant currency in the range of $425 million to $450 million, given second half restructuring savings and other cost measures.

Adjusted EPS at constant currency is now trending to the lower end of the range of $3.70 to $4.05, mainly due to rising interest expense. As I mentioned at the start of the year, adjusted EPS guidance reflects higher interest expense, higher tax expense, and lower pension income. These three items were expected to account for $0.35 of additional adverse impact this year. This impact is now anticipated to be $0.44 due to the rising interest expense.

As a reminder, our adjusted effective tax rate is expected to rise this year from 20% between 22% and 23%. This is primarily due to a less favorable mix of earnings by country and an increase in the UK statutory rate. In terms of lower pension income, note that our pensions have been frozen since 2015 and are above 90% funded. We are reaffirming free cash flow in the range of $210 million to $235 million. Positive cash earnings and lower incentive payouts for fiscal year 2022 performance are expected to be offset by higher cash taxes and interest. Our CAPEX outlook is now around $110 million to $120 million, modestly lower than anticipated. Capital investment is primarily focused on platform and product development and research and corporate talent development.

In summary, we are navigating difficult market conditions in our academic lines, but our core growth areas are solid. We are aggressively managing our cost structure to mitigate the revenue challenges and taking tangible steps to reduce complexity. With that, I’ll pass it back to Brian.

Brian Napack

Thanks, Christina. Before I sum up, let me say a few more words about our segment realignment. The changes we are making in Q3 focus on our education group. The research segment will remain unchanged. Research Publishing and Research Solutions are already focused customer-centric lines of business that complement one another and that together are a strong market leader, delivering new pathways for profitable growth.

In Education, Wiley targets two primary customer groups, universities and corporate customers. Organizing our segments around these groups will naturally result in a simpler, more customer-centric and more efficient Wiley. Our new academic segment will consist of two lines: Academic Publishing and University Services. Academic Publishing will incorporate both Education Publishing and Professional Publishing. Together, the Academic segment team will focus on delivering outcomes for learners in university and other institutional settings, leveraging Wiley’s full suite of content platforms and services. This alignment will enable both revenue and cost synergies over time.

Our new talent segment will include Wiley’s Talent Development and Corporate Training Products and Services. The new talent team will be fully focused on meeting the critical talent needs of employers by delivering all of Wiley’s training, sourcing, and upskilling solutions. This customer-centric alignment will allow us to achieve more revenue and cost synergies as we optimize both our offerings and our go-to-market efforts for the corporate customer. We will begin reporting on these new segments in Q3.

So, let me quickly summarize the key takeaways for the quarter. Despite the difficult economic environment, we continue to execute well on our commitments. Our results have been weighed down by consumer spending and enrollment challenges in education. But our core growth areas of Research Publishing, Research Solutions, and Corporate Talent Development remains strong. We are actively tackling our cost structure to adapt to cyclical headwinds and to drive long-term margin improvement. We believe that a simpler Wiley is a better Wiley, and we are consistently taking action to achieve greater focus and alignment with fewer moving parts. This quarter, we are reorganizing education around our customers to drive better alignment, synergy, and efficiency. Wiley’s consistently strong balance sheet and cash flow continue to enable us to reinvest while rewarding long-term shareholders with dividends and share repurchases.

One final but important point. We’ve decided to move our Investor Day, which had been planned for April to October, specifically to October 12th. We had hoped to have it sooner, but we’re shifting it for two important reasons. First, we are now hard at work driving towards a simpler and more impactful Wiley, and we want to be able to share our full plans with you. We will be better able to do this in October. In the meantime, we will continue to update you on the progress we are making along the way. In addition, the ongoing market uncertainty, particularly affecting our academic lines has clouded our ability to commit to long-range targets, which we plan to do when we see you in October. In the meantime, we will continue to update you on the progress we are making along the way.

In closing, as always, I want to recognize the global Wiley team for continuing to execute at a very high level through this challenging period. Every day, they bring their full selves to work and make a real difference. And for that, I’m extremely grateful. So as 2022 comes to a close, I wish all of them and all of you a very happy holiday season and a healthy and prosperous 2023. I’ll now open the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Dan Moore with CJS Securities. Your line is open.

Peter Lukas

Hi, good morning. It’s Pete Lukas for Dan. Just starting with what’s causing the clients to slow spending on professional learning. Is it the general macro concerns that you mentioned or are there other factors out there and if so, what visibility do you have in terms of how long that may last? And on the flip side, what do you see as the main drivers for the strong corporate training that you’ve seen?

Brian Napack

Yes, great question. Great to have you on the phone, Pete. So in professional learning, we are seeing some softness but not related to a slowdown, particularly in corporate spending. What we’re seeing is slowdown in consumer channels. And that slowdown in consumer channels is largely of cyclical nature. The underlying demand for our professional learning products remains quite strong. In fact, we’re seeing excellent growth out of our corporate training in — for team leadership and certainly our Corporate Talent development, which we’ll talk about later.

What’s driving demand in professional learning and some of the softness is effectively an industry restocking that’s happening at our key retailers, key online retailers where they have adjusted their inventory policies and practices and in the near term have rightsized basically their inventory according to what they believe demand is. And so therefore, that is what we would call a cyclical or a temporary thing and that should come back. There is, however, and it’s important to note an underlying headwind that is economic that is driving our — that is driving softness in consumer demand. And that consumer demand relates to professional buying a book.

It relates to a person spending money on their own personal development. It’s — but we’re not seeing the demand yet from the — any demand softness at this point due to the economic pullback in professional development funded by corporations. And that’s leading to a very solid performance in our corporate training business, where businesses, which are growing very, very nicely and in talent development, specifically, as you can see, we’re seeing a tremendous investment that companies are making in the acquisition, the development, and the retention of their talent.

Notably, one of the things that we’ve seen in this cycle different than prior cycles is a reallocation of funds in corporations towards digital education and talent development in the most key areas that companies need to succeed. Companies are still obliged to pursue their strategic plans and they’re investing to do so. What we’re seeing is less demand across the industry or sector for in-person training, but we are primarily in digital training at this point in time. And so we’re seeing pretty good performance there, as you can tell from our numbers.

Peter Lukas

Very helpful, thank you. And in terms of the faster-than-expected decline in print materials, would you say that’s mainly due to enrollment or has usage taken another leg down?

Brian Napack

Yes. So no, by all accounts, usage and attachment of curriculum materials professionally published are the same as they’ve always been. What’s happening now is different than in prior periods where we had concern about the evolution of this segment in the long run. What we’re seeing is very similar to the answer that I just gave you on professional learning, which is that during this period, we’ve seen significant economic changes, and that has caused two primary factors, the largest being this inventory adjustment that we see at our retail channels, that accounts for the bulk of it. And the second is this idea of consumer spending. Just because I call it consumer doesn’t mean it doesn’t affect students.

Students are looking for ways to save money like everybody else. And so we have seen — certainly, we’ve seen enrollment softness. We see that across a number of our businesses that does affect the underlying demand for the units of our products, both in our publishing lines and also in our services line. But really, what we’re seeing right now is primarily a factor of these two cyclical factors that I keep talking about, with regard to inventory and underlying consumer demand. But not shift in the underlying nature of the sectors that we’re in, or their long-term outlook.

Peter Lukas

Great, thanks. And then just jump into research. Prior to Open Access becoming a larger percentage of your research revenue, you would provide updates on what percentage of your following year’s journal subscriptions were under contract. Is that still a relevant metric for you and if so, how is it trending related to years past?

Brian Napack

Yes. No, we’re not providing that guidance now. And it is — I will say that we continue to see very, very strong demand, most importantly, for our transformation of OA agreements. These are the agreements by which we help the market transition from the traditional models to the more mixed and open models that we’re going to see in the future.

We’re at a point in the year, which is where we haven’t seen much of that activity just because this is the way that annual timing and patterns work out. We will see — we have a very strong pipeline of transformational agreements and our more traditional subscription agreements will continue to chug along as normal, and we expect that to pick up seasonally as we move through the balance of the fiscal year. So yes, things are trending as we would expect them to from a pipeline perspective and from a transition perspective. And that, of course, supports our long-term Open Access strategy, our long-term aggressive forward-leaning strategy towards embracing the new models in the marketplace. That’s a little less relevant these days to talk about traditional subscription deals.

Peter Lukas

Great, thanks. And last one for me, just on a more big picture. Can you give an update on capital allocation priorities, outside of internal investments, is M&A still the priority or is it more focused on debt reduction and perhaps opportunistic share repurchases?

Brian Napack

Yes, I’ll start the question — answering the question, Pete, and then I’ll hand it over to Christina. So our capital allocation is driven by our belief in the long-term opportunities that we have as a company. And we divide it obviously into multiple categories. We’ve been very consistent about that. The first category is the investment in the future of this business, both through organic investments, which you’ve seen and through inorganic investments such as M&A. And I will say our M&A strategy here is consistent. We are being cautious, of course, we’re being patient, and we’re being focused. So our strategy drives our capital allocation and our capital allocation is thus tightly aligned to our investment priorities in our growth areas. Those being research publishing, research solutions, and corporate talent development. And everything flows from that. So Christina, perhaps you can say a few more words.

Christina Van Tassell

Sure, thanks. Hi Pete, we are continuing to remain balanced on capital allocation to Brian’s point. And just a note there that historically, our steady cash flow has allowed us to be very balanced and has rewarded us in difficult times, and this is no exception. So we’re continuing to look at this. We are still keeping margin towards our priorities. You specifically mentioned debt, that is moving up our priority list given the market environment and our interest expense outlook, and we will look at that as we go forward. But I’m not uncomfortable with our leverage right now, which is at a good place.

And finally, on dividends and share repurchases, you also mentioned, this is a reminder there, we allocate about half of our free cash flow to dividends and share repurchases, and that’s in line with last year. And so we have a long streak of raising our dividend annually. We’re paying a nice yield and share repurchases have also been steady. And we’ll continue to look at that, but we’re going to continue and stay the course there. Thanks for the question.

Peter Lukas

Great, thank you for the time. I will jump back in the queue.

Operator

There are no further questions at this time. I will now turn the call over to Mr. Napack.

Brian Napack

Alright. Well, I want to thank everyone for joining us today. I want to wish everyone a very, very happy, healthy holidays and a prosperous New Year, and we will look forward to seeing you and sharing our Q2 results in March. Thanks very much.

Operator

Ladies and gentlemen, thanks for participating. This concludes today’s conference call. You may now disconnect.