Pearson blames US business for current profits struggle
Pearson shares had fallen through the floor on Thursday morning, after the company warned that its full-year profit would be at the lower end of its guidance range.
The FTSE 100 education publisher said it was continuing to expect revenue to stabilise in the current year, but explained that weaker-than-expected trading in its US Higher Education Courseware business in the key selling season meant it now expected adjusted operating profit to be at the bottom of its guidance range of between £590m and £640m.
At the nine month mark, it said it expected group underlying revenue to be broadly flat, with Core markets up 5%, Growth up 3% and North America down 3%.
Pearson said businesses generating 75% of its revenue were growing by around 3% in aggregate, and said it was seeing “strong” performance in its structural growth businesses.
It said it was seeing continued strong growth in Online Program Management (OPM), Connections Academy, its K12 virtual schools business, Pearson Test of English (PTE) Academic, and Professional Certification, which was driven by the incremental investment the firm had made in those businesses over the past two years.
US Higher Education Courseware, which accounts for 25% of revenue, was down by around 10%.
The digital-to-print split was expected to shift from 55%-45% at the end of last year to 65%-35% at the end of the current year.
Underlying pressures from lower college enrolments and the use of Open Educational Resources (OER) were all said to be “largely as expected”, according to the board.
However, it added that it believed the weaker-than-expected trading had been driven by a number of factors, with the first being that the key selling season had seen a “significant” industry wide acceleration of print attrition as channel partners and students turned away from print products more rapidly than anticipated.
A “modest” adoption share loss or around one percentage point was likely caused by delivery issues due to the implementation of the company’s new Enterprise Resource Programme in the second half of last year, as well as its sales force re-organisation.
Over time, it said it expected to regain that share following the roll out of its next wave of digital products on the Global Learning Platform, which launched in September, along with a sales force which it said was “strategically aligned” to its customer base.
Digital revenues were up modestly, but registrations were down slightly due to a continuation of the trends the board had identified at the half-year, with greater-than-anticipated pressure in Developmental Mathematics, the strategic retirement and deprioritisation of long tail products, and some impact from the loss of market share.
Pearson said its strategy to move to more affordable access-based models, such as Inclusive Access, digital products and partner print rental, would result in a “more sustainable and predictable” business.
Over the last three years, the board said the firm had moved significantly more of its business into digital and access-based models, and had transformed its technology platform, which it said had laid the foundations for its next generation of digital products.
It had also reduced its costs “substantially” through re-organisation of the sales force and product services, and implementation of its “modern” Enterprise Resource Programme system.
Finally, Pearson said its simplification plans were on track, and added that its maintained a “strong” balance sheet.
It said it remained on track to deliver at least £330m of annualised cost savings, with the full benefits accruing from the end of 2019 onwards.
The company described its financial position as remaining “robust”, adding that it continued to expect year-end net debt to be broadly in line with 2018.
It said it now expected US Higher Education Courseware revenue to decline between 8% and 12% in 2019 - weaker than its original guidance for a 0% to 5% decline.
The board confirmed that it now expected Pearson to deliver adjusted operating profit in 2019 at the bottom of its guidance range of £590m to £640m, with trading impact from its US Higher Education Courseware business offset by good underlying growth in the rest of the business and temporary additional cost savings.
Pearson said it was expecting adjusted earnings per share at the bottom of its guidance range of 57.5p to 63.0p.
“The third quarter has been significantly weaker than we expected in US Higher Education Courseware,” said Pearson chief executive officer John Fallon.
“Whilst difficult in the short term this places more importance on our work to remake this part of Pearson and we are exploring new ways of deploying our new technology platform so that we can offer students highly affordable, convenient, adaptive, digital courseware.
“We still expect revenue across Pearson as a whole to stabilise this year, with encouraging growth in many parts of the company.”
The company’s chair Sidney Taurel added that Pearson had “come a long way” through its digital transformation, adding that it was in “much better shape” than it was three years ago.
“There are still challenges to overcome in our US Higher Education Courseware business, which we are all very focused on. We are now a leaner, more efficient and more digital company with a strong balance sheet, which gives us a platform from which we can address these challenges.”
As at 0903 BST, Pearson shares were down 15.96% at 723.6p.