As a nonprofit global library cooperative, we have a goal to achieve an operating income over time that ranges between 2% and 4% of revenues. This approach ensures that OCLC remains financially sound and supports the necessary capital investments required to meet the needs of our membership. Historically, we have achieved this goal with revenues in line with the cost to deliver services, plus interest and dividend income from our investment portfolio.
In recent years, we have experienced operating losses from delivery of services to our members. (See Operating results before portfolio activity in the Summary of consolidated activities table below). These losses result from restrained price increases combined with heavy strategic investment into new services, as well as technology upgrades, facility renovations and related staff resource realignment. Dividend and interest income from our investment portfolio, which is considered in the annual operating plan, has enabled us to partially offset these operating losses.
Unlike other library services organizations, we reinvest all of our income into building new products and programs rather than distributing funds to shareholders or business owners. Our revenue stream from library services and the investment portfolio provide a stable cash flow that allows for strategic capital investments while supporting the long-term viability of OCLC.
| FY16 | FY15 | ||
|---|---|---|---|
| Operating Activities |
Library service revenues | $203.4 | $202.8 |
| Operating loss before portfolio activity | ($10.0) | ($13.1) | |
| Investing Activities |
Investment portfolio activity | ||
| Dividends and interest income | $7.2 | $7.8 | |
| Net realized gains | $0.2 | $7.7 | |
| Net contribution | ($2.6) | $2.4 |
Revenues from library services in FY16 remained stable compared to last year. WorldShare Management Services and Sustainable Collections Services experienced significant growth, which offset a decline in some of our more mature service offerings.
Although we had negative operating results before portfolio activity in FY16, our financial results improved over the previous year, reflecting the impact of significantly reducing expenses and carefully managing costs on an ongoing basis. We continued to invest in our technology to support libraries by funding the largest upgrade of our technical infrastructure in our history. These investments are expected to support revenue growth in our core library services in the coming years and enable OCLC to return to our historical operating income targets of 2–4% of revenues.
Net contribution after investment portfolio activity for FY16 was a loss of $2.6 million. Although a decrease from the prior year, this loss was largely due to a reduction in realized gains from the portfolio. Portfolio gains vary from year to year based on general investment market conditions. We continue to prudently invest our portfolio while maintaining a solid financial foundation that permits appropriate spending in key areas addressing the critical needs of the membership.
The Audit Committee, consisting entirely of independent trustees, assists the Board of Trustees in its oversight of our financial reporting process, and is responsible for, among other things, reviewing with Deloitte & Touche LLP, independent auditors, the scope and results of its audit engagement.
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Our investment portfolio was valued at $228.0 million on 30 June 2016, decreasing from $238.5 million in the prior year. The reduction resulted from the liquidation of selected investments to fund the largest technology investment in OCLC's history and a major renovation of our Kilgour headquarters facility as well as supporting operating cash requirements.
The investment portfolio includes OCLC's Sustainability Fund and $19.1 million in advance subscription payments entrusted to OCLC. The Sustainability Fund is managed similarly to an endowment and supports OCLC's continuity while providing financial flexibility and permitting us to focus on long-term objectives and commitments to our membership. The Sustainability Fund generates a stable source of dividend and interest income to fund operations and facilitates OCLC's ability to borrow at competitive interest rates. It also provides additional liquidity to fund major capital investments.
At the end of FY16, OCLC's outstanding debt was $85.7 million compared to $73.8 million last year. This increase reflects a new $30 million financing completed in April 2016, the proceeds of which were used to support significant investments in OCLC's technology infrastructure and facility renovations.
OCLC invests its resources to address requirements identified by the membership. This model allows us to invest in focused technology, research and development to meet library needs well into the future. As shown in the chart below, we continued to invest in a variety of areas and specific initiatives that are critical to our member libraries (amount shown includes expensed research and development plus capitalized development). During the past five years, these expenditures have exceeded $170 million.
Thank you for your interest in OCLC and your contributions to the cooperative in FY16. If you have any questions or comments about this annual report, please send an email to annualreport@oclc.org.
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