OCLC is a nonprofit, library cooperative. We operate in a business-like manner and are driven by our public purposes of furthering access to the world’s information and reducing library costsproviding shared services, research and advocacy programs to deliver on these purposes.
Our operations and research initiatives are funded by revenues generated by services provided to participating libraries. Unlike alternative library services organizations, OCLC invests resources into new services and programs rather than distributing funds to shareholders. OCLC also maintains an investment portfolio, or Sustainability Fund, that is managed in a manner similar to an endowment.
In FY14, revenues were in transition, as membership adoption of our newer cloud-based services is in the early stages of acceleration. Expenses outpaced revenue, as we continued to heavily invest in product development and innovation to support library relevancy in our rapidly evolving communities. The strength of our Sustainability Fund, which grew 15 percent, affords us these decisions.
The Audit Committee, consisting entirely of independent trustees, assists the Board of Trustees in its oversight of OCLC's 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.
“OCLC Board members and leaders strive for the highest levels of integrity, responsibility and accountability. It is imperative that we meet the needs of our membership.”Cindy Hilsheimer, Chair, Audit Committee, OCLC Board of Trustees
In FY14, our revenues increased 3.4% from last year primarily due to the acquisition of HKA and the growth in the number of libraries implementing WorldShare Management Services (WMS). HKA is a Dutch library systems provider that serves 60% of the public library market in the Netherlands. All Dutch library holdings are in WorldCat and this acquisition represents an extension of services to Dutch public libraries.
FY14 revenues include $161.3 million from the Americas (75%); $8.0 million from Asia Pacific (4%); and $44.3 million from Europe, the Middle East and Africa (21%). Approximately one-quarter of our revenues now come from EMEA and the Asia Pacific regions.
The cooperative’s revenues are transitioning from our traditional product lines to our new, cloud-based services. Over the next three years, this change will accelerate as we migrate all services to the WorldShare Platform, which will drive new revenues with new functionality in e-services.
OCLC has historically operated at break-even, with revenues that approximate the costs to deliver services and programs. However, for the past four years, OCLC has consciously operated at a loss. This loss is attributed to:
The decision to support the membership during a challenging economy with three years (20102012) of no price increases in the Americas and only modest price increases outside the Americas. In FY14, we increased prices by a modest 3% on average following a 2.75% increase in FY13.
The accelerated and significant investment in the WorldShare Platform and the complement of cloud services including WorldShare Management Services and the WorldCat knowledge base of e-resources, which strengthen our foundation for the future and that of our membership.
Operating at a loss long term is not a sustainable business model. Over the coming years, we will seek to achieve break-even by delivering new services to the membership, reducing costs of systems to be retired and the tapering of our capital investments.
In FY14, we continued to invest in research and development critical to the future of libraries. We spent $38.1 million on the cooperative’s strategic initiatives, including WorldShare cloud services, development of the WorldShare Platform and the transformation of our traditional services. Over the last five years, these investments have totaled more than $165 million.
Our cloud-based services are in the early stages of migration and the management services have a slower adoption cycle than our traditional services. But we are committed to investing forwardto engaging with our members to ensure that we are delivering services that support the libraries of the future. Our move to the cloud and our work to deliver new cloud services and applications have a powerful potential to both lower operating costs for members and provide a platform where we can work together to deliver value to our users.
OCLC maintains an investment portfolio that includes our Sustainability Fund and library funds entrusted to OCLC. At the end of the fiscal year, the portfolio totaled $239.3 million, compared to $207.7 million on June 30, 2013. The increase is due to the upswing in values in the financial markets, including capital gains of $28.6 million that the cooperative realized and reinvested into the portfolio during the year. The interest and dividend income is allocated to partially support library service and research activities. In FY14 the portfolio generated $13.2 million in interest and dividend income. The portfolio also funded a 4% return to members who made advance payments on their subscriptions.
Built up over many years, the portfolio is professionally managed in a manner similar to a university endowment and includes a Sustainability Fund of $181.6 million, which serves as a reserve that potentially could cover about 80% of the cooperative’s operating expenses. The portfolio secures library deposits for services and deferred library service revenues, which totaled $57.7 million on June 30, 2014.
The Sustainability Fund also secures short- and long-term debt borrowings, which were $59.8 million on June 30, 2014, and helps the cooperative borrow at low interest rates, much lower than the investment returns realized in the Sustainability Fund. By June 30, 2014, OCLC was in a much stronger position than at the depth of the recession in FY09 when outstanding debt approximated the size of the Sustainability Fund.
In FY14, OCLC had an operating loss of $8.6 million. This loss was offset by interest and dividend income of $13.2 million from the investment portfolio. Net contribution of $33.2 million was significantly better than both budget and prior year due to favorable non-operating activityinvestment incomecombined with unbudgeted gains of $28.6 million on OCLC’s investment portfolio.
OCLC is financially stable and strengthened by its growing global membership and investment in the WorldShare cloud solutions. We are well-positioned to advance our unique mission of delivering services that leverage cooperation and deliver efficiencies of scale to libraries around the world. As of June 30, 2014, the cooperative had assets of $428.8 million and corporate equity of $266.9 million. Net working capital, which represents funds available for current operations, was $182.1 million. Cash and investments were $252.4 million.