Harlequin Improved

Harlequin revenues were flat for the full year 2007 versus 2006. Revenues of $462mm versus $471mm in the prior period were negatively impacted by foreign currency which accounted for almost the entire variance. EBITDA showed some improvement with 2007 results of $65mm versus $63mm. Excluding the impact of Forex EBITDA was $6.3mm better than 2007.
From their press release:

Excluding the impact of For Ex:

• Overall Book Publishing revenues were down $1.0 million in 2007
• North America Retail revenues were up $3.6 million
• North America Direct-To-Consumer revenues were down $5.0 million
• Overseas were up $0.4 million
  
• Overall Book Publishing operating profits were up $6.3 million
• North America Retail operating profit was up $5.8 million
• North America Direct-To-Consumer operating profit was up $2.2 million
• Overseas operating profit was down $1.7million

The company has spoken about their efforts to manage expenses in the North American business and they seem to have made some impact in that direction with the improved operating margins. Additionally, the company was not beset by any unforeseen operating issues that bedeviled them in prior years (like the bankruptcy of a distributor). The company also said that improved sales via the internet - primarily direct to home - price increases and lower (presumably more effective) promotional spending also supported the better margin performance.

It appears the company is focusing now on improving their international operations which appear problematic. The company recently announced an expansion of their efforts in Indian, which is not material in their current results, but they must also look to improve results in Japan and the UK. In both these countries there appears to be a shift in how consumers interact with Harelquin (Mills & Boon) with decreases in direct to home in the UK as an example. The company will look to use their experience in the US to improve the UK market. In Japan the company is experimenting with Manga versions and mobile phone distribution but as yet these efforts have not been significant to offset the decline in core sales.

Press Release

Of note also, is that Torstar the corporate entity that owns Harlequin also posted solid results especially in light of the declines in newspaper properties. Torstar revenue of $1,546.5 million grew 1% and EBITDA of $225million grew 11.5%. The company stated that all their primary operating units performed well.

Informa Posts Strong Results

Chairman Peter Rigby has ruled out bidding for the trade magazine division of Reed Elsevier (Reed Business Information) saying the advertising business is not one they are in. The company did however post strong financial results that were in line with the expectations set in mid-December. The acquisition of Datamonitor which at the time seemed an expensive deal looks to have been integrated well and already producing impressive results. From their press release here are their highlights:

• Revenue £1.13 billion – 9% pro forma growth
• Adjusted operating profit £261.0m – 19% pro forma growth
• Adjusted operating margin rises above 23%
• Strong trading across all three divisions (Academic & Scientific, Professional and Commercial) and all three business streams (Publishing, Performance Improvement and Events)
• Datamonitor delivers 22% pro forma revenue growth for the full year
• Adjusted cash conversion 110% of adjusted operating profit
• Total dividend increases 39%
• Confident of 2008 outlook
• Academic and Scientific division grows adjusted operating profit by 25% to achieve a 29% margin
• Strong yield increases and drop through from electronic delivery
• Professional division benefits from Performance Improvement extending global reach
• Non-US revenues increase by 29%
• Commercial division growth fuelled by extension of Large Scale Events portfolio and 38% increase in Dubai revenues

Chairman Rigby: "We have transformed Informa in recent years. We have built a business based on recurring revenue streams which provides strong defensive qualities, but not at the expense of continuing good growth. We are of course aware of the current uncertainty in the financial markets, but at this point the board sees no signs in our trading to alter its expectations that Informa will deliver another strong performance in 2008. Our confidence in the future of the business is reflected by a 39% increase in the dividend over 2006."

Wolters Kluwer Reports Results

Wolters Kluwer appear to have completed a strategic transformation of their business which began more than three years ago as the current CEO Nancy McKinstry took up her role. The company did not see significant top line improvement in 2007 - up 4% - but they have gained in operating margin to 20% and with a better product mix they should continue to see improvement. During 2007, the company divested their education division and booked a nice gain (similar to Reed and Thomson in that respect).

In her comments, McKinstry noted that over half the companies revenues come from online and electronic products and services, and she believes improved results will derive from this better product mix. As the company continues to invest in work-flow solutions and integrated products she went on to say "I am confident in our ability to leverage our superior market positions, our improved organic growth and more efficient operating structure to achieve enhanced value to our customers and shareholders."

Other highlights from their press release:

• Organic revenue growth was 4% (2006: 3%)
• Reported revenues of €3,413 million, grew 6% in constant currencies (2006: €3,377 million)
• Ordinary EBITA margin improved to 20% (2006: 17%)
• Ordinary EBITA of €667 million increased 27% in constant currencies (2006: €556 million)
• Diluted ordinary EPS increased 25% to €1.38 (2006: €1.10), 35% in constant currencies
  Free cash flow of €405 million (2006: €399 million, which included a €53 million one-time tax refund)
• Revenues from online and workflow solutions grew 9%
• Structural cost savings of €161 million, an increase of 26% (2006: €128 million)
• Divestment of Education: sales price €774 million; book profit €595 million; net proceeds €665 million
• Share buy-back program completed (€645 million returned to shareholders)
• Net profit for the full year was €918 million (compared to 2006: €322 million), supported by he divestiture of the Education division

Five Questions with Redroom.com

A few months ago, a website dedicated to authors named Redroom.com was launched and was noted by SF Chronicle.

Redroom.com, which premiered Dec. 21, is one of the more ambitious online communities for writers to date and perhaps the most timely, aiming to capitalize on the current potential for profitability of social-networking sites. It features 150 authors (with 400 more to come), ranging from Amy Tan and Salman Rushdie to Edinburgh Castle Pub owner Alan Black; Graham Leggatt, executive director of the San Francisco Film Society, who moonlights as a sci-fi writer; and local mystery writer Cara Black.

The site has been well funded and has a strong list of staff members all of whom are 29 yrs old. In addition to the brand name authors noted above, Redroom.com also received the endorsement of Barack Obama who, as an author, joined the community earlier this month.

Ivory Madison is the founder and CEO of the corporation and was kind enough to answer my five questions.


Question 1: There is a lot of background information about the genesis of your site but I am curious as to how you convince authors that they should belong to a social web site like RedRoom. How do you pitch this idea/concept to the big name authors like Salman Rushdie?

Big name authors are just like relatively unknown authors in that some of them are extremely friendly and helpful, and some are not. There’s a different story with every author. In the case of Salman Rushdie, one of the friendly and helpful ones, we made him aware of our interest in supporting public discussion of new books beyond just the best-sellers, which is a cause of his, too. Also, since he didn’t have a website, perhaps finally having an official home online was appealing—you know, some famous authors are frustrated by how much misinformation there is about them on the internet. Authors find it daunting to design and build a website, even if they can afford it, and they’d much rather be asked to join a community where all their friends are, and where the technology is so easy to use, now that there is one.

Question 2: What do you expect of the authors as they ‘socialize’ at Redroom. Thus far, has the interaction surprised you in any way with respect to the amount of participation or the (perhaps) different manner in which they use the site which you may not have anticipated?

I have been surprised and delighted at how positive and funny everyone is. I mean, everyone is so encouraging, and authors, not just readers, are posting fun comments on other authors’ pages. The culture has a life of its own. I’ve also been surprised how, every day, some authors take the time to write original, long, brilliant, fully edited essays for our homepage and as blog entries. Really amazing work on politics, on divorce, religion, media, philosophy…and it’s there for anyone to read, anywhere in the world, for free. So far, I’m in awe, because we’ve barely rolled out a small number of the features I envision us offering. The blogs are the hotspot. If you go to the central blog page at , http://www.redroom.com/blogs, you’ll see all the latest blogs, just posted. That’s everyone’s favorite page.

Question 3: In your PR material you indicate that you will soon reach a community of around 500 authors. Is this a managed level of do you see the site growing significantly larger beyond that size. Assuming you want to grow larger do you see any issues with the mix of ‘celebrity’ authors and those possibly less blessed?

We already have hit the 500 author mark, in less than 60 days of the site being live, and we have another 500 in moderation waiting to be approved. Every day, our developers work on scalability issues, trying to find an interim solution while building the long-term solution, to make the site user-friendly as we grow. We intend to be the starting point for finding authors, so we’ll keep growing rapidly. As for the celebrity issue, we already have more non-celebrity authors than celebrity authors, and they interact. Some of the busiest pages are those of lesser-known authors who are real community-builders, and so most the “stars” on our site are people you may have never heard of (although one of our most prolific bloggers is one of our most famous—Amy Tan). The platform gives unknown authors a chance to promote themselves and be part of a larger conversation with a larger audience.

Question 4: The SF Chronicle notes you are the MySpace for Authors. Is this moniker something you are comfortable with or not? Do you see yourself doing the same for lesser known authors as My Space has done with musicians?

We like when we’re called the “MySpace for Authors” because it’s quicker and people say, “ahh, I get it,” and I don’t have to explain much further. We’re different in many ways, of course. Our authors must apply and not all are approved, much of our content is pretty great—educational and entertaining, you don’t need to know anything about programming to make your Author Page look good, and most of our users are well-read and good writers. I agree that we’ll provide the same important service for lesser-known writers than MySpace did for bands; that’s a great analogy—one that one of our founding authors, Po Bronson, suggested to me when I was still sketching out the site on cocktail napkins.

Question 5: What about this community has surprised you since you launched the site? What can we expect next from Red room?

It surprised me that authors are so honest and revealing, sharing experiences such as the death of a loved one, or a miscarriage. It surprised me that authors showed up at my office with champagne, cakes, signed books, in gratitude for finding them new readers or just making them feel they finally had a home online. What can you expect next from redroom.com? Great question to finish up with: In just a few weeks, we’re rolling out Member Pages, which will be very similar to Author Pages, so that aspiring writers and avid readers can participate. Since you work with publishing professionals, keep watching Red Room through the rest of the year as we roll out Publisher Pages. With the Author Pages, we asked all the authors we knew what they wanted, now we’re asking publishing professionals what they want and we’d love to hear from them about what we could do to make them feel at home, too.

Proquest: In Case You Care

Proquest, hereafter referred to as Voyager Learning Company is for sale. The company announced they had retained Allan & Co. to determine strategic options for the company. So far has Voyager fallen, that this news barely caused a ripple of notice from industry outlets. No doubt the bank will already have done the rounds with all educational publishers to gin up some interest. As some will recall, the company has sold all saleable assets of the company over the past four years but it has also been embroiled in accounting irregularities, had its stock delisted and is also the target of copyright and shareholder lawsuits. This is pretty grim news for a company with such a long and illustrious history which included brands such as Bell & Howell, UMI and even R.R. Bowker. (If you are not paying attention they join CQ Press and Haights Cross as recently 'in-play' educational publishers).

The company finally produced their 2005 10K on August 31 last year and announced a few weeks ago that they would produce audited 2006 accounts by the end of first quarter 2008. The only good news about this appalling schedule is that they “anticipate much of the 2007 work will be done in parallel with the 2006 work” and thus may be almost caught up by April.

There have been a number of management changes as a result of the divestitures and the irregularities. The company is now run by Richard Surratt, Voyager Learning Company's President and CEO. The remaining business operations of the company are now in Dallas and Voyager has reduced to 11 the number of employees still in Ann Arbor. (Imagine the morale there). As the accounting becomes clearer so will the current net value of the business; further asset write downs are possible and whether these result in significant income statement charges which in turn result in transferable tax credits remains to be seen. The company did revalue goodwill as a result of their restatement resulting in a $180mm charge to the 2004 income statement.

The company appears to be performing satisfactorily and while they have completed a reinvestment of their core product line they operate in a very competitive marketplace in a down market. The company expects to have $75million to $85million in cash by year end which is lower than planned due to the loss of a copyright lawsuit ($7mm) and lower full year revenue expectations ($3mm).

The company faces a consolidated shareholder suit and the company expects discovery to start sometime in early 2008 and eventually go to trial in 12-24mths. They have lost one attempt to have the suit dismissed. The law issue complicates matters significantly not least because in reading some of the employee agreements (bolstered by stay bonuses) they expect a sale of the company within the next 12mths. Who will be around to defend the lawsuit and who will pay for that? The company also have a derivative law suit that "asserts claims for breaches of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, and unjust enrichment." and "breaches of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, and unjust enrichment" (10k). (Sounds like someone checked every box on the form).

The company combines Voyager Expanded Learning, ExploreLearning and Learning A to Z into the category “Voyager Operating”. The following is from their earnings conference call:

For the three quarters ending September 30, 2007, the Voyager Operating business had estimated and preliminary revenue of $87 million, Earnings from Continuing Operations before Interest and Income Tax, which is referred to here are as EBIT, of $10 million and EBITDA of $26 million. This compares to preliminary revenue of $94 million, EBIT of $13 million and EBITDA of $30 million for the same nine month period of 2006. Due to Q3 results coming in less than expected, we are adjusting our previously issued full year guidance to a range of $106 to $112 million in revenue versus previous guidance of $116 to $124 million. We project a resulting EBIT range of $7 to $10 million versus the original guidance of $10 to $13 million. And lastly we are updating our EBITDA guidance to a range of $29 to $32 million versus original guidance of $32 to $35 million.

Reviewing their 2005 10K shows how significantly the company has been transformed.

• Net sales of $545.9million versus $439.6mm in 2004
• EBITDA of $28.9mm versus $(149.1)mm in 2004 which included a goodwill impairment charge of $180mm
• Full year revenues for Proquest Education (Voyager Operations) were $91mm in 2005
• Proquest Information & Learning revenues were $271.4mm. This is the business unit sold to Cambridge Information Group for the bargain basement price of $218mm in February 2007. Operating income may be a loss of around $10mm - hard to say given the presentation.
• 2005 revenues for the automotive group were $183mm and this unit was sold for approximately $490mm. Go figure.

Documents:

Allan & Co. Press Release

10K

Times Online Notes E-Book Opportunity

The Times Online looks at Cookery books and notes this:

This enduring power of the cookery book is worth bearing in mind when Sony and Amazon, and doubtless others, eventually inflict their electronic book readers on the British public. Their arrival, probably this year, undoubtedly will be accompanied by excitable speculation about the death of the book, predictions about the inevitabilty of digital domination and the expectation of hard times that lie ahead for publishers. Ideally, all this discussion will appear in physical newspapers and magazines before the writer turns, later that day, to reading their hardback/paperback tome of the moment. Never mind, it is easy to overvalue the impact of new techology (those with long memories may recall an excitable discussion about virtual reality a decade and half ago).

They go on to make a point I have raised:

That means a consumer really has to want to buy a digital book reader. It might cost twice the annual book bill. So the only way that electronic readers will take hold among consumers is if they become a good way of reading other printed products, such as newspapers or magazines.

Couldn't have said it better myself... (Link)

The price of the Kindle is approximately $300. I would argue, rather than reducing ebook prices to $5.99 (versus print prices of $20) the pricing for the device should be similar to the razor blade/razor model. Even then I am not sure the model would work. Why? Because most readers don't read that many books. Most of the readers of publishing blogs like this one, O'Reilly Radar and those with a publishing audience represent a skewed view of the appeal of reading. We all love it and we all do a lot of it. Regrettably, the rest of America is not like us and on average the average book buyer will read less than 3 books per year. (Research studies note that even 'book buyers' are a small group).So aside from early adopters and techno-fadists who flocked to acquire the first Kindles who will buy the next batch? If the average reader buys three books a year for a total of $90-100, why would they buy an ebook reader for $300 even if those three books were free? Your average consumer is not a dummy and can do the math.

Links of Interest

The Dallas DA has released boxes of material relating to the assination of JFK. The Dallas Morning news has launched a crowdsourcing effort to classify and identify the documents. Link. Tip o' hat to Brantley).

I wasn't aware Apple has an iTunes site dedicated to selling educational content to universities and students. Link

Larry Lesig may run for Congress and has launched a Change Congress initiative. (Tip to Hodgkin).

Stephen Fry has launched his Podgrams and also has an enjoyable post about digital cameras.

"Just about everybody who needs a camera has one. What is wrong with that Ixus I bought three years ago? That old Pentax Optio will see me through to my old age, don’t it? No! No, you crazed enemy of freedom, you wild-eyed anti-capitalist, you deranged luddite. Haven’t you heard of Face Detection Technology? Smile Capture? Best Shot Automatic YouTube Uploading?

WorldCat has a blog all to its own.

Shatzkin on horizontal to vertical redux.

Apax is already sniffing around Reed Business Information. Link

Tell this to Harpercollins. Link

Charkin Returns

Just as the opening credits role in High Plains Drifter, we discern the image of the returning fighter but its not Eastwood it's Charkin returning from the blogging wilderness to post a brief effort on Eoin Purcell's site.

Sales of some novels are spectacular but even the most spectacular compare in revenue and terms very unfavourably with, for example, a drug, a car, an airline, or an oilfield. As an industry we should be very grateful for all the attention (and I am) but why this journalistic obsession with the economics of books and fiction in particular?

Still no news about his permanent return.

Mills & Boon in India

The BBC takes up the story of Mills & Boon (Harlequin) entering the Indian market which I noted a few weeks ago. Link

Although Mills and Boon - which has nearly three-quarters of the romantic market in its home country of the UK - is only now launching in India, their books are already popular in the country because they have been unofficially introduced from abroad.
Many in the reading group describe themselves as long-time readers.

Reading groups members acknowledge the stories are fanciful. Rachana Srivastava, for example, says that she grew up on a "staple diet" of the publisher's works, which have moulded her perception of the ideal man.

My post: Hold on to your Sari (I really only note it because I was particularly proud of my headline).

More Reed Elsevier

Reed announced preliminary results yesterday which were somewhat overshadowed by the announcement of the Choicepoint acquisition and the proposed divestiture of the Reed Business Information division.

In the earnings presentation CEO Davis noted that their revenue growth is ahead of the market, their operating margin continues to improve year over year and the company is delivering good cash generation and EPS growth. Over the past four years underlying revenue has grown between 3-6% per year but it is operating profit which has seen annual growth expand from 3% in 2004 to 10% in 2007. Operating profit growth has improved faster than revenue due to the changing sales mix toward on-line revenues as well as corporate wide initiatives on costs reduction and consolidation.

In discussing the proposed divestiture of the RBI business, Davis used justification similar to the comments used to explain the Harcourt divesture but it boils down to several things. First, the online component of RBI is not growing fast enough to keep up with Elsevier, LexisNexis and Martindale. This will dampen long term revenue growth for RE. Second, the timing and investment required to speed the process could be significant and Third, the payback is not obvious in so far as online ad based 'magazine-type' content has yet to establish itself as a business that can replace revenues from print based subscription and advertising. Davis's comments reflect forward thinking regarding the strategic growth of RE as a platform based content solutions provider: Financially the current position of RBI is quite strong versus their segment. Indeed their performance supports the suggestion that Davis will not rush to sell RBI and is open to various scenarios.

In 2007, RBI revenues were £906m up 3% and operating income was £119m up 8% over the prior year. Offline revenues account for 70% of total revenues. Despite the long term concerns of Davis, this appears to make RBI a £300m online trade magazine/business information publisher which will prove a strong selling point for investors when they come to kick the tires. (Online revenues were up 20%). Currently, RBI includes Reed Exhibitions which the company has decided to retain. According to the company, Reed Exhibitions has continued to grow aggressively and perhaps, there are more business opportunities across the RE properties which management believe can be leveraged. Additionally, management may be considering expanding Exhibitions through acquisition. Exhibitions revenues were up 12% in 2007 and operating income up 8%.

It will be interesting to see how this divesture plays out. The division has some brand-name assets including Variety and Publishers' Weekly but it may be the more mundane titles that have been driving the online growth and investors may be more impressed with these units than the bigger brands. That could lead the way to a break-up strategy with some of big brand properties going to separate buyers and a strategic buyer purchasing the balance of the company. For example, I could see Variety going to Zuckerman or Wasserstein.

Note: Reed also noted the sale of Harcourt generated total proceeds of $4.95bn which was a 3.0x multiple of 2006 revenue and a 20.8x multiple of 2006 adjusted operating profit. The divestiture generated a substantial disposal gain.

Reed Preliminary Results presentation.

Reed Elsevier Acquire Choicepoint

In my predictions for 2008 I noted that we would see increased activity in the insurance business information space. In my view, this space is ripe for the type of consolidation seen in law, tax and business information that results in dedicated and must have information platforms for practitioners and analysts. Both Thomson and Reed dominate the law and tax segments and it looks like Reed is taking the first step to dominate and create a platform application for the insurance industry. Reed announced this morning that they will by Choicepoint for $3.5bill and assume $600mm in debt.

Commenting on the acquisition, Sir Crispin Davis Reed Elsevier's Chief Executive Officer, said: "The acquisition of ChoicePoint represents a major further step in the building of our risk management business and in the development of Reed Elsevier's online workflow solutions strategy. The market growth in risk information and analytics is highly attractive and ChoicePoint brings important assets and market positions that fit well with our existing business and, in combination, can be leveraged to very good effect.

The new unit will be combined with existing risk management revenues in the Lexis business unit that will result in a business unit with over $1.5billion in revenue.

Other points from the press release:

• ChoicePoint has a leading position in providing unique data and analytics to the attractive insurance sector (over 50% of Choicepoint's $982 million revenue and 80% of its business operating income from continuing operations in 2007) and highly complementary products and new capabilities in the screening, authentication and public records areas.
• The combination of ChoicePoint's highly regarded data and analytics assets with LexisNexis's market leading technology can be leveraged to create greater opportunities in addressing the growing risk information and analytics needs in insurance, financial, legal, screening, law enforcement, public safety, healthcare and other sectors.
• The combination will improve top line growth and deliver considerable synergy benefits through the application of powerful technology, increased scale and integration of resources.
• The acquisition will accelerate Reed Elsevier's revenue and profit growth; is accretive to adjusted earnings from the first year; and is expected to deliver a post-tax return on capital in excess of Reed Elsevier's cost of capital by the third year, with returns continuing to climb thereafter.
• Consideration of $50 per share in cash; unanimous recommendation of the ChoicePoint board; subject to ChoicePoint shareholder and regulatory approvals. Acquisition to be financed from committed new bank facilities.
• The acquisition significantly enhances Reed Elsevier's portfolio through expansion in these attractive long term growth markets, and accelerates Reed Elsevier's progress in providing online solutions embedded into customer workflows.

The strategic importance of this acquisition for RE is noted in the last bullet where the company emphasizes the importance of workflow solutions for their customers. Information is not a commodity, but is only a component of a broad market offering. A company offering monolithic data products; that is the online equivalent of a printed database, will continue to face market challenges in competition with more integrated offerings where content is a component in a larger holistic workflow tool.

In a closely related story, Reed also announced that they will sell the Reed Business Information unit. This sale has long been rumoured and analysts have suggested that Reed should have vacated the space long ago; however, Reed were progressing through a logical strategic revamp which has culminated in the acquisition of Choicepoint, the divestiture of Harcourt and now the sale of RBI. The company says the divestiture will reduce exposure to the cyclical advertising markets, which of course was as true today as it was five years ago. Best guess would be private equity.

The same press release also notes their full year 2007, results with underlying revenue growth of 6% supported by online information and workflow solutions. Topline reported revenue was £4,584m up 2%. The company also saw operating margin improve as a result of favorable product mix with underlying margin up over 100 basis pts. Adjust EPS was up 12% in constant currency. The company noted that adverse exchange rates materially impacted the results. More in the press release.

Lulu Publishes 4,000 Titles per Week

The Guardian takes a look at the US self-publishing market and notes some impressive statistics fron Lulu.com.

Lulu says it publishes 4,000 new titles each week and already has a catalogue of 232,000 books. "Our success is that each week we publish between 10 and 20,000 titles; one at a time," said , the senior vice president of operations at the company, Andrew Pate.

The company is only five years old and says it is doubling in size every year. Earlier this year, I noted the growth of Blurb.com which published 80,000 titles during 2007.

The Guardian also discusses Booksurge.com and AuthorHouse as variations on the theme and notes the recent new relationship between Borders and Lulu. More from the article:

It is not only business people who want to self-publish. Lulu's Pate says an ageing population, with more money, more life experience and more time on their hands to write will combine with the new and improving technologies to help drive the self-publish business. The ubiquitous use of Microsoft Word together with desktop publishing software, digital printing technologies and workflow solutions linked to the internet and "bang, you have got a whole new market that could not exist without each of those pieces together".