The disappointing earnings forecast from Reed Elsevier in its trading update released on December 2 reflects forecasts quoted in constant currencies, which essentially means that effects of exchange rate fluctuations are removed to reveal growth rates that would have occurred if there had been stable exchange rates over time. As the article in the Independent points out, "[a]bout 60 per cent of the group turnover [revenue] comes in US dollars". With the results quoted in actual current currencies, the forecasts would be "considerably lower" than the "mid to high-single digit" earnings guidance for 2004 provided in the update.

Although the weak dollar is bad news for Reed Elsevier, there is a mitigating factor. Reed Elsevier is not the only publishing company that is being affected by the weak dollar, especially in the Scientific, Technical, and Medical (STM) segment. Nearly all of the top STM companies--Thomson, Wolters Kluwer, Springer, T&F Informa, Blackwell--are based either in Europe or Canada and all of these companies will have their earnings deflated because of the weak US dollar relative to the euro, pound, and Canadian dollar.

On the positive side, there is good news reported from Reed Elsevier. The Education division is coming out of a slump and should experience good growth in 2005. Reed Business is buoyed by growth in online advertising. And, the Legal division is building momentum with its on-schedule integration of the Seisent acquisition and with fast-growth online initiatives in the small law segment.

During the conference call last Thursday led by Sir Crispin Davis, CEO Of Reed Elsevier, the Science and Medical division elicited the most questions from the investment analysts. Davis pointed to flat growth in academic library budgets as the primary challenge for this segment. Although outside analysts continued to press Davis about the impact of the Open Access movement on Elsevier, Davis responded with the facts that renewals for STM journals are strong, e-only subscriptions continue to grow, and article submissions are up 7% year-to-date. But, Elsevier is not sitting still. The Elsevier Science and Medical group continues to invest in new products such as SCOPUS that respond to changing patterns in usage of online STM content.

The weak dollar may be an added challenge to Reed Elsevier and other top STM publishers, but at least it's a challenge that is shared among most of the top players. The exceptions, Wiley and ACS--based in the US--will welcome the advantage that a weak dollar affords them.