Pearson shares rise after optimistic trading statement
Cost cuts by education publisher help offset decline in core US textbook business
Shares in Pearson rose after the educational publisher issued a more optimistic forecast on its full-year profits as cost savings help to offset tough trading in its core US division.
John Fallon, chief executive, cautioned on the outlook for the US business where the company is battling a trend for students to rent textbooks instead of buying them.
“US higher education continues to be a tough environment and we expect to see declines in US higher education courseware for another couple of years,” he said in a trading update for the first nine months of the year.
But the group forecast that operating profits would be at least £576m — having previously guided analysts to expect earnings to be as low as £546m — as it ploughed ahead with cost savings, and trading in its US higher education courseware business was less bad than feared. The upper end of its profit forecast has stayed at £606m.
The shares rose 5.3 per cent to 655p, having risen as much as 10 per cent in early trading.
Mr Fallon said: “We are encouraged by our progress and our competitive performance.” He added there was “still a lot to do” but that he was “confident we are on a path to return Pearson to long term sustainable growth”.
The group’s underlying revenues fell 2 per cent in the first nine months of its financial year compared with the same period in 2016. Sales in the US fell by 4 per cent because of contract losses in its school exam business and what it called “weakness in school and higher education courseware”.
“Today’s release provides a degree of comfort on trading [and] that management has grasped the nettle on cost savings following several false starts,” Roddy Davidson of Shore Capital said.
The former owner of the Financial Times earlier this year issued its fifth in a series of profit warnings after what it described as an unprecedented decline in its US education business. The company has been on an economy drive since 2013, when it vowed to remove £1bn of costs from the business by 2020.
A record loss in 2016 prompted around two-thirds of investors to oppose a 20 per cent pay rise awarded to Mr Fallon last year.
Since that protest vote in March, Pearson has sold its 22 per cent stake in Penguin Random House, slashed its dividend and said it would cut another 3,000 jobs. By 2020, Pearson aims to reduce its workforce by 10,000.
Pearson added in the trading statement that its tax rate for the full year would fall to 17 per cent from the previously expected 21 per cent “as a result of the favourable outcome of certain historical tax issues”.
To offset the structural decline in textbook purchases, Pearson is now focused on publishing more ebooks and has launched a pilot programme to rent out its own print books.
Mr Fallon said on Tuesday that both strategies were working well, with increased sales generated by cuts of 20 per cent to 50 per cent in its ebook prices.
Selling individual ebooks is less lucrative for Pearson than its legacy business of selling printed titles, although the company has responded to this challenge by building a digital subscription model.
“The difference to remember here is that unlike in journalism this is not an advertising supported model,” Mr Fallon said of the publisher’s transition away from analogue.
“It is people paying for content and services. We are going from selling a $300 dollar textbook where we get paid once to a digital courseware model where people buy access rather than ownership and we could get close to $100 every time people use it.”
Mr Fallon added that Pearson expected to bolster its profit margins by cutting costs in its digital unit, after a series of acquisitions meant its online businesses were operating on different platforms and had overlapping costs.
The publisher added it had agreed a deal to insure a third of its pension scheme liabilities — totalling £1.2bn — with insurers Legal & General and Aviva. This “substantially reduces” the risk that Pearson would be unable to fund future retiree benefits and was agreed at no further cost to the company.