Pearson surges as investors cheer cost-cutting, strategic review

Pearson surged on Friday as the education publisher posted a 6% increase in first-quarter underlying sales, reiterated its guidance for the full year and announced further cost-cutting measures and a strategic review of its K12 courseware publishing business.

Sales in the first three months were up 6% in underlying terms, led by growth in revenues in North American higher education courseware, professional certification, Online Program Management, US K12 courseware, South African school textbooks and UK student assessment. This was offset by expected declines in US student assessment and in Learning Studio, a higher education learning management system which is being retired, and declines in Middle East and India due to business exits.

The company maintained its guidance range for 2017 profit of £570m to £630m, adjusted earnings per share of 48.5p to 55.5p and cash conversion in excess of 90%.

It also announced a strategic review of the US K12 courseware publishing business, which it said has seen a slow pace of digital adoption in basal courseware, high capital intensity and a challenging competitive and market environment.

In addition, Pearson said it was currently undertaking the detailed planning to enable it to deliver annualised cost savings of £300m by the end of 2019, with further detail on the timing and costs of these plans to be revealed at the time of the interim results.

Chief executive John Fallon said: "Though the bulk of our sales come later in the year, our first quarter trading is encouraging and in line with expectations.

"We are creating a leaner Pearson, equipped to innovate and win in digital education. The measures we are announcing today build on the work completed last year and will allow us to further simplify our portfolio, reduce costs and accelerate our digital transformation."

Hargreaves Lansdown analyst Nicholas Hyett said: "You’ve got to hand it to Pearson CEO John Fallon, he doesn’t do things by halves. Every quarter it seems that another part of the staid publishing house he inherited is laid on the block in the drive to move the group into the digital age – this time it’s the turn of the K12 US courseware business.

"Unchanged full year guidance and a positive performance from North America are both likely to be taken well by the market given Pearson’s recent profit warning. Having already disposed of several businesses the group is trimming the cost base to reflect its reduced size, £300m of cost savings announced today are equivalent to 12% of the entire 2016 operating cost base - not to be sneezed at!"

However, Hyett pointed out that Pearson’s current strategy remains a higher risk bet on the group’s ability to seize market share in the emerging digital education space.

"Even then, with plenty of free resources already available online, questions remain about whether the group will be able to make that market share profitable.”

At 0840 BST, the shares were up 14% to 748p.