John Wiley Update: The One that Got Away

The errors of omission are far more serious than the errors of commission. They don't show up in the numbers.

Last year around this time, I posted about John Wiley, the 205-year-old, family-controlled company whose core business is the publishing of academic journals. Following the "peer review rings" controversy and the accompanying class action lawsuit threat, the stock price had tanked to $30. Last September, I wrote:

To summarize, we have estimated that Wiley would be worth $3B in 10 years. You can buy it today for $1.9B. That's not even 5% CAGR. Definitely not worth the risk when the 10Y Treasury yields 4.3%. Even if you bought it at the lows (<$30), it is still not much more than 7%.

However, if you were optimistic about the turnaround and expected Wiley to show good progress in the early years, you wouldn't count that much on the 5% growth rate but rather on the stock repricing earlier. My parallel, and rather biased, scenario includes a shorter holding period (1-3 years) and promises a 10-30%, but I will not go into it.

My analysis shows that the investor is not being rewarded enough for the risky turnaround of Wiley's otherwise gold mine of a business. However, to be 100% honest, at some price below $30, I will be really tempted to own Wiley once again.

I didn't like it at $30, but I had a purchase order at $25, which was never executed. And, as it happened, I missed what would have been my fourth successful ride in this boat. Wiley reached $2.5B market cap (+32%) as soon as July of this year. I definitely didn't expect this result in just 9 months. My optimistic scenario called for a repricing up to $3B in 1-3 years. This was based on the then recent Hindawi scandal and the pending restructuring to get rid of the non-core businesses and streamline the company. However, Mr Market applauded Wiley's management's efforts much earlier. Those of you who bet on this scenario were rewarded with 30-50% returns, depending when exactly they bought, in less than a year.

But what happened in this year? What problems were addressed and what still remains to be done?

Two major and one minor thing happened:

1. Wiley hopped on the AI bandwagon.

2. The Hindawi scandal was handled well.

3. The restructuring is going well and ahead of plan.

Feeding the AI Beast

First and foremost, Wiley signed two contracts licensing its content to some of the big guns out there that train LLMs. Specifically, both were one-off, nonexclusive, limited-duration deals that fed Wiley's book content (3 years or older) to the data hungry LLM models. The first contract was booked in FY24 Q4 (Feb-Mar 2024, $23M), the second one — mostly in FY25 Q1 (Apr-Jun 2024, $17M of $21M).

It seems like Wiley is now testing the waters with the backlist book content while holding back the more valuable research content. It was until recently that the companies training LLMs didn't pay anything for the data. However, big content owners, such as the New York Times, Reddit, and Getty Images, started taking action to protect their businesses. NYT was the first one to file a high-profile lawsuit against OpenAI and Microsoft in December 2023. This topic is just starting to get serious attention.

In this environment, it makes a lot of sense for Wiley to wait to negotiate better deals for its precious journal content. Moreover, while these one-off contracts give Wiley a nice cash bump, a really transformative deal would position Wiley as a long-term data provider to the AI industry. It takes time to negotiate such a deal.

We see the content licensing opportunity in two stages. The first as discussed is participating in the near-term development of foundational models. The second is in recurring licensing arrangements over the medium to long term, as these models and applications come online and as information-centric corporates bring our content into their AI environments.

Our content is critical to ensuring scientific accuracy and impact and delivering optimal learning outcomes. Therefore, AI models should be trained on high-quality authoritative content like Wiley's. At the same time, we're being very selective about choosing when and how to partner with AI companies. We are careful to pick the right partners and to adhere to a strict set of principles around AI.

— CEO Matthew Kissner, FQ1 2025 Earnings Call

However, Wiley is not only feeding content to the AI models. The company is modernizing. It is developing a new platform to streamline the process of publishing scientific papers and to make distribution more efficient. Wiley is also incorporating AI advances into their workflows.

In addition to content licensing and application, another very real GenAI opportunity for us is in product and publishing innovation. Through various AI-based tools, we are transforming how we publish by shortening authoring time and effort, increasing editorial productivity and streamlining content workflow. We have already deployed AI into our research platform using it to safeguard research integrity at the point of article submission.

In fact, we've introduced a new service that incorporates 6 distinct tools to identify potentially compromised content, including paper mill similarity detection, problematic phrase recognition, researcher identity verification and GenAI content detection among others. We're already piloting this service with key society and publishing partners as the industry tackles this issue head on. Through our past experience, we've become a thought leader in this area, and we're sharing our insights with others.

Finally, we're already deploying AI to materially improve office productivity and customer service as we begin to transform how we work. In customer service, for example, we're already seeing cost savings and reductions in handle time through the latest AI augmentation and automated processes.

It is also worth noting that Wiley has some unique datasets.

Another important opportunity for us is in spectral data. As a leading chemistry publisher, Wiley has one of the most comprehensive spectral database collections in the world. In lay person's terms, Wiley's spectral database libraries allow end users to identify molecules and molecular compounds based on a unique chemical signature. Wiley has just released two new database collections using advanced AI techniques to significantly expand the number of compounds available for analysis from food-related compounds to industrial compounds. The end goal here to help scientists reach better conclusions faster.

The Hindawi Nonevent

I thought the Hindawi issue would cause more damage. However, management followed Buffett's advice:

"Get it right, get it fast, get it out, get it over"

The special issues program was suspended immediately. Over 11,000 papers were retracted. Nineteen Hindawi journals were closed. An investigation to identify the bad actors was conducted. Checks on editors were bolstered. The Hindawi brand was sunset. The whole debacle cost $35-40M and detracted from Research revenue. However, this was the kind of catastrophic reputational risk that could sink a company that stands for high standards in publishing.

I can only say that management has done an admirable job of tackling this and it shows in the quick stock price rebound.

Restructuring Progress

We've essentially executed our full value creation plan ahead of schedule. Just last week, we closed our third and final divestiture and during the quarter, actioned the remaining $40 million of the $130 million cost savings program.

— CEO Matthew Kissner, FQ1 2025 Earnings Call

The core Research segment remains the main focus of management, and it is doing quite well despite the Hindawi controversy. It has a huge recurring revenue base that is 96% digital now. The segment is strongly correlated with global R&D spend, which is expected to grow 4-6% annually over the long term.

Another impressive achievement is the reduction of Wiley's global office footprint by 40%.

During the year, we further consolidated our office footprint with 2 office closures and 4 reductions. Since March of 2020, we've reduced our global office footprint by around 40%.

Going Forward

…we're projecting full year revenue of $1.65 billion to $1.69 billion for a top line growth rate of 2% to 4%. This is driven by expectation of low to mid-single digit growth in Research and low single-digit growth in Learning. The two AI projects already executed, one in Q4 and one in the first half of this year, largely offset each other in year-on-year comparisons.

Adjusted EPS is expected to be in the range of $3.25 to $3.60 for a growth of 17% to 29%. The primary drivers are higher expected adjusted operating income and accrued interest income from the divestitures offsetting higher interest and tax expense.

Free cash flow is anticipated to be approximately $125 million up from $114 million. This is due to improved working capital and lower restructuring payments, offsetting higher CapEx and higher incentive compensation payments compared to the prior year period.

...our full year CapEx projection is $130 million.

…allocated $32 million towards dividends and share repurchases, up from $29 million in the prior year.

By the way, Wiley's has reduced share count by roughly 10% over the past 5.5 years. Not too shabby.

The investment plan follows the main objective defined by the CEO below.

First is to drive recovery and growth in Research. We experienced an unprecedented year in fiscal '24. I remain fully confident in a recovery given the essential nature of what we do, the enduring draw of our general brands and the momentum we saw exiting the year. I'm happy to say that our recovery is playing out as expected, if not better, both in our financial performance and leading indicators.

Our second objective is to move decisively on near-term AI opportunities. We executed a second content rights project with a large tech company this quarter with $17 million of the $21 million total value recognized in the quarter. Nearly all of it is in Learning. We are seeing interest from other large tech companies and R&D-centric corporates.

Our third objective is to continue to drive performance and profit improvement through our value creation plan. As noted, we've closed all of our divestitures and actioned the $130 million cost savings program.

— CEO Matthew Kissner talking about the key objectives

Management is targeting $200M free cashflow in FY26 as earnings expand and CapEx normalizes. This is quite a step up from the $125M target in FY25, but it is achievable. I am still weighing the evidence, because I find it hard to buy stocks that are up 50% in less than a year.

I do see the potential of the revamped Wiley with the AI winds in its sails, but I also see the cheerful reception by Mr Market, and I am having second thoughts. I will revisit Wiley again next quarter.