Reed Elsevier, the unsung star of the internet revolution

While others struggle, Crispin Davis claims to be making most from the internet

Reed Elsevier is the internet star you never see feted as a leading light of the internet revolution. It is not mentioned alongside the like of Amazon, eBay and AOL. Yet last year, Reed's internet revenues topped £1bn, out of total revenues of £2.6bn. This year, online sales should grow further, maybe by 10 or 20 per cent. It is a major reason why Reed has proved not only to be resilient, while other media companies have suffered horribly in the current downturn, but why it is able to deliver double-digit earnings growth in this tough environment.

Yesterday, reporting first-half results, the company said it was on track to grow earnings by double-digits again this year and increase revenues faster than the markets in which it operates. Underlying pre-tax profits were up 3 per cent at £408m, on track for some £970m for the full year. This business is heavily weighted towards second-half earnings.

Reed and its chief executive, Crispin Davis, are not a glamorous media industry story. But he and the company are very effective performers. The group will have grown earnings by 10 per cent a year under an economic slowdown, so its record in better times will be pretty impressive. The company is split quite evenly into four divisions: business magazines, science and medical, legal and education.

The group does not get the profile or recognition it deserves. This is one of Britain's leading media companies, highly profitable with a stock market value of £6bn, and the only one that has delivered an internet success story. Contrast that with some of the other big players. EMI, the music group, is still struggling to come up with an online business model. Pearson's internet revenues, via ft.com, are tiny, despite significant investment. Reuters has made its content available in an attractive internet form but this has hardly saved the company from being savaged by the downturn.

Reed's low profile is partly the result of the dryness and inoffensive nature of its business area - it is not exactly sexy. Its consistent performance in recent years has kept it out of the headlines. And Mr Davis does not seem much interested in personal profile.

This year, Reed did cause some general excitement but for reasons Mr Davis must deeply regret. There was a furore when it was revealed that the terms of the executive bonus and share options scheme would be redrawn, after the previous plan failed to pay out.

Mr Davis argued that he and his team had hit all the operational targets, so it was not fair that they should not be rewarded because the company's share price had not responded. The new scheme got through a shareholder vote and the controversy seems to be largely behind the company now.

Reed's internet success has come on the back of an investment of several hundred million pounds on developing online services. The company is fortunate in having high-quality content that cannot be substituted, especially in the scientific area, which, along with legal, dominates its internet revenues.

Mr Davis said: "We invest between £260m and £290m a year. To be investing that much is unusual. It means we're on the front foot here."

Earlier this year, Mr Davis claimed Reed had the third biggest internet revenues of any company in the world, behind AOL and Amazon. That seems to be have been an uncharacteristically sloppy remark. What about T-Online, Wanadoo and Expedia, for instance? Each of these companies have greater web sales.

But certainly among pure content providers, Reed is the champion. Yesterday, Mr Davis added another claim - that Reed makes more profit from the net than anyone else - though he did not say how much.

The company's ScienceDirect service, which has put the content of its leading journals online, is the powerhouse of the internet strategy. ScienceDirect now has 4.5 million articles on its system, whereas, Reed says, the nearest competitor has just 400,000 articles.

Paul Richard, an analyst at Numis, said: "It's a pretty compelling business model. By putting the material on the internet, Reed saves on production and distribution costs. And, for the end-consumer, it's more useful this way."

In the legal field, some 60 per cent of revenues are online, and usage of Reed's services here are expected to grow by a fifth this year. In science, an estimated 75 per cent of revenues come from the internet.

Under Mr Davis, there has been determined cost-cutting, with some $500m (£310m) saved between 2000 and 2002. A further $150m will be cut this year, which will mean more job losses. The company has focused on its four core areas, buying the large Harcourt business in 2001, bolstering its science, medical and education offerings. Mr Davis is now happy with the shape of the business, though he still puts aside $500m a year for bolt-on acquisitions.

Of course, there are concerns. The business-to-business magazine arm is continuing to see revenues shrink and Reed is not prepared to say when an upturn may come. In education, which is mostly in the US, the budgets of individual states are under severe pressure. This year will be a relatively weak year for buying school textbooks and 2004 is expected to be another poor "adoption" year. The legal and scientific markets are currently growing at well below long-term average rates.

But investors can hardly complain if, in this challenging environment, Reed is growing revenues faster than competitors and is delivering double-digit earning increases. Its four divisions are well balanced, unlike Pearson, for example, which is much more heavily dependent on its schools business. Mr Davis is sitting much more comfortably than his media rivals.