What Are the Profit Prospects for Publishers?

The publishing industry has faced challenges on several fronts in the last five years. During the recession consumers cut back on their purchases of books as they reduced their overall discretionary spending.

The second challenge has involved moving from print to digital format -- so consumers can conveniently and quickly access books on devices such as personal computers, smartphones, tablets, and e-readers -- and to create online platforms to reach customers. 

Serving one market segment and serving it well
Scholastic Corporation (NASDAQ: SCHL  ) is the largest publisher and distributor of children's books in the world, and an innovator in educational technology and related services. The company creates books, interactive games, learning technologies, and curriculum-based materials. Grown-ups remember the company's phenomenal success with the Harry Potter book series.

In the first fiscal quarter ended Aug. 31, the company reported revenue of $276.3 million. This was down 5.8% from the same quarter last year due to lower sales for the Hunger Games trilogy books, which the company expected. The star performer was the educational technology and services segment, where new product launches helped produce revenue growth of 19% to $94.8 million and a 46% increase in operating profit to $36.2 million. 

Overall, Scholastic had an operating loss of $45.9 million compared to a loss of $47 million in the year-ago quarter. The company often incurs a loss in the first quarter when schools are not in session.

Looking ahead, the company reported that book fair bookings were on track and sales of Hunger Games books are expected to rise as the release date of the "Hunger Games: Catching Fire" film approaches.

Scholastic reiterated its guidance that total revenue for the fiscal year should be about $1.8 billion, with earnings per diluted share in the range of $1.40 to $1.80.

Facilitating a more educated world
John Wiley & Sons (NYSE: JW-A  ) distributes knowledge and knowledge-enabled services. These include digital and print journals, reference works, digital and print books, and online program management services for learning institutions.

The company is transforming itself from the print publisher it has been since its founding way back in 1807 into a provider of digital content and services, which accounted for 52% of the company's revenue in the first quarter of the fiscal year ending Aug. 31, compared with 45% last year.

Total revenue grew 4% for the quarter compared to the same quarter last year. Increased journal subscription revenue and digital book sales helped drive a 5% increase in its research segment revenue. Professional development saw a 6% drop in sales due to lower print book sales. The education segment was up 13% due to growth in its Deltak online learning technology, offsetting a decline in print textbook revenue.

Cost of sales dropped nearly 80 basis points compared to the same quarter last year. Operating and administrative expenses rose 6%, however, which resulted in a 1% decline in operating income to $43.3 million.

Global earnings from global learning
London-based Pearson (NYSE: PSO  ) also is transforming itself from a book publisher into a digital services company. Pearson is putting great emphasis on marketing in developing economies such as Africa, India, and China. The company's cornerstone objective is to be "the world's leading learning company."

Pearson recently issued its results for the first nine months of the year. The company reported a 4% increase in sales (at constant exchange rates). The company reported a similar 4% increase in its North American education segment led by good growth in digital product sales and online learning platforms, but offset by weak market conditions for textbooks.

International Education also grew 4% as demand was strong in emerging markets. At its FT Group, which includes the Financial Times newspaper, weak advertising demand kept sales level with the previous year. Circulation did reach its highest level in history due to 24% growth of digital subscriptions.

The company completed its joint venture with Bertelsmann to form Penguin Random House, which publishes fiction from popular authors such as Dan Brown as well as non-fiction.

Pearson said it expects adjusted full year operating profit to be lower than in 2012 due to the accounting impact of the joint venture and continued weak growth in college textbook sales. EPS will be "broadly level" with 2012, the company says.

What we learned
The good news is that the global need for information continues to grow and advertisers are gravitating to the Internet, which bodes well for electronic publishers. Books aren't going away; they are just appearing in new forms.

Scholastic's strategy of supplying schools with print and digital instruction packages and providing high quality books for children's after school reading is a way of blending their core strengths and making them stronger together.

It's important to note that the educational technology and services segment in revenue terms was 74% higher for the quarter than the children's book publishing segment -- and should be the key driver of future growth. My reservation about this company is, where do you find the next Harry Potter? 

John Wiley & Sons has been able to keep churning out a substantial profit while it makes the transition to digital publishing and educational technologies. As print book revenue continues to drop the speed of this transition takes on additional importance. A key number to follow with Wiley is the journal subscriptions number, which accounted for nearly 39% of the company's total revenue. 

Pearson is in a state of transition as well, shifting resources to its high growth segments. The pace of this restructuring is accelerating, according to the company. Regarding the restructuring, CEO John Fallon said, "overall, it is going very well..." However, he also admits it "carries some short term operational risks..."

My first choice of these three is Wiley. The company has successfully progressed through this era of rapid change in its industry with agile strategy and sound financial management. There's no reason it won't continue to do so.

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