The New HarperCollins

With the “new” News Corp. slated to become a stand-alone corporation at the end of June, executives from the company made a presentation before investors in New York in late May and again in Australia on June 5 talking about where the various subsidiaries in the group—which includes HarperCollins—stand and what their growth prospects are. HC CEO Brian Murray stressed the strengths of the book market in general and HC in particular as the company successfully makes its way through the digital transition. The book industry is in no danger of going the way of the music business, Murray said, as the move to digital increases the number of book readers and also provides ways for publishers to operate more profitably. “The financial profile of the book business is changing for the better as a result of digital,” Murray said in his speech in Sydney.

While the growth of digital has pressured some bricks-and-mortar outlets, Murray said total consumption of all books should rise: “Our view is that physical retail of books will stabilize, and print will eventually coexist with e-books. So we project a very favorable transition for global publishers going forward.”

During his presentation, slides showed that the July 2012 purchase of Thomas Nelson will put an end to a decline in HC’s revenues when fiscal 2013 ends June 30, and that EBITDA (which News Corp. defines as revenue less operating expenses and selling, general, and administrative expenses) will finish the year well ahead of fiscal 2012. HC’s adjusted EBITDA of $111 million in fiscal 2012 excluded $25 million in settlement costs over the e-book price-fixing litigation; reported EBITDA was $86 million. Through March 2013, HC sales were up 15.7%, to $1.04 billion, while EBITDA increased 23.7%, to $120 million. Murray noted that the integration of Nelson and Zondervan has yielded cost savings of $22 million and that the merger has gone better than expected.

In addition to the Nelson purchase, profits have improved through increased sales of digital books and improved print operating efficiencies. HC lists its “growth pillars” as (1) maintaining leadership in fiction, children’s, and Christian categories; (2) improving profitability and working-capital dynamics through digital; and (3) continuing to extract cost efficiencies in print publishing. Beginning in May 2011, HC has been moving more of its warehousing and print-on-demand operations to Donnelley, a process that has continued and will lead to HC closing five of its nine warehouses by 2014. To date, consolidating warehouses has resulted in $10 million in savings.

Digital sales, meanwhile, accounted for 21.3% of revenue ($221 million) in the third quarter of fiscal 2013, up from 1.1% in the third quarter of fiscal 2009. In a chart showing that e-books sold through the agency model are more profitable than print books, HC noted that, by eliminating manufacturing, distribution, and return costs and paying a lower royalty, an e-book’s “contribution margin” is 75.0% compared to 41.4% for hardcovers. HC said it plans to boost overall digital sales by upping the number of “storefronts” it sells in from 70 to 150 in one year, expanding its e-book catalogue, engaging in “dynamic” pricing, and introducing more digital-first products. In terms of pricing, Murray said HC has learned “dozens of techniques” to adjust the prices of its titles. This “deep understanding” of digital pricing, Murray said, “has led us to successfully negotiate increased wholesale prices of our new releases with all of our major e-book retailers, proving that pricing power of exclusive quality content still rests with the publisher.”

At present, HC has 100,000 active titles, including 40,000 e-books, and derives half of its revenue from its backlist; 57% of its revenues come from its top 15 customers. HC sells books and licenses in more than 100 countries, and Murray said international expansion is one of its growth engines, with Mexico and Brazil seen as offering prime growth opportunities.

Murray acknowledged the increasing impact of self-publishing, but explained that it has been HC’s experience that “authors choose HarperCollins because they benefit from a brand and professional resources to promote, market, and publish, and help monetize their content before and after a book is published.” Still, he said, HC’s digital-first effort, Impulse, serves as a kind of self-publishing vehicle, building new writers in e-books and then migrating the more successful ones to print.

The only hint of a problem pertains to the publishing industry in general. Under a “publishing industry” heading, a series of arrows points up in the cases of profits, margins, and workingcapital efficiency, but sideways for revenues as increases in digital sales are offset by a decline in print. Despite the “steady” revenue picture and the “threat” some observers have raised to large publishers about digital and self-publishing, Murray said he has never been more confident in HC’s future in his 16 years with the company. “We’re already executing and growing our business in new ways, while many of these observers just keep talking,” he said. “We’re transitioning from a very inefficient print value chain to a far more efficient digital value chain and maintaining the value of our content in the process.”

Unit Economics

*Assumed books earned out

HarperCollins Results, Fiscal 2010-2012 (in millions)

Excludes $35 million one-time gain in fiscal 2010 for revenue and earnings as well as excluding litigation settlement for $25 million on fiscal 2012 earnings.