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Pearson delivers 2% increase in underlying first half year revenue

publication date: Jul 31, 2019
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Pearson has reported an adjusted operating profit of £144m for the six months ended 30 June 2019 (2018: £107m), on revenue down 2% to £1,829m (2018: £1,865m). In underlying terms (adjusted for portfolio changes and forex), first half revenue increased 2% with growth across all three geographic segments - North America up 1%, Core (including UK, Australia and Italy) up 6%, and Growth (including Brazil, China, India and South Africa) up 2%.

Pearson says the increase in underlying revenue was due to continued momentum in its four structural growth opportunities – Online Program Management (OPM), Connections Academy (Virtual Schools), Professional Certification (Pearson VUE) and English Assessment - and stabilisation in other parts of its business, more than offsetting expected declines in US Higher Education Courseware and US Student Assessment.

Adjusted operating profit increased 30% in underlying terms in H1, which Pearson says reflects sales growth and savings from the 2017-2019 restructuring programme, partly offset by cost inflation and other operational factors.

Pearson says it expects to deliver underlying profit growth and stabilise revenue in 2019, and for revenue to grow in 2020. The company’s 2019 adjusted operating profit guidance is unchanged at between £590m and £640m.

In the first half year, Pearson achieved incremental cost savings of £60m, closing two offices and completing 80% of its headcount reduction. During H2 Pearson expects to deliver further incremental savings of £70m and an additional £55m or more in 2020. The company says its Simplification Plan remains on-track to deliver over £330m annualised cost savings by end of 2019.

The company had net debt - pre IFRS 16 - of £726m at 30 June 2019 (2018: £775m).

Commenting on its interim results, John Fallon, Chief Executive said: “We've had a good first half, with underlying growth across all divisions, as we start to benefit from accelerating our shift to digital. We are on track to at least stabilise revenue this year and return the company to top line growth from 2020. We are excited by the new digital products and platforms we're now launching, and our ability to help millions more people prepare for, develop in, and change careers through a lifetime of learning."

In US HE courseware, the company’s largest business, underlying first half net revenue was down in line with the middle of the company’s full year guidance range of flat to minus 5%, against a strong comparative in H1 2018. Digital sales, which includes the digital portion of textbook bundles, grew moderately on a like for like basis, Pearson said.

Pearson says the decline in US HE courseware revenue was in part due to a 1.4% fall in total US College spring enrolments, with combined two-year public and four-year for-profit enrolments down 5.8%, affected by rising employment rates and regulatory change impacting the for-profit and developmental learning sectors.

During H1, Pearson says it continued to make good progress with its strategy of shifting from ownership to subscription based access models, signing 84 new institutions to Inclusive Access programmes. The company now has 781 institutions signed up to Inclusive Access, representing around 16.0% of Pearson’s US Higher Education Courseware revenue (2018: 11.5%).

In July 2019, Pearson announced that all future releases of the company’s 1,500 active US Higher Education Courseware titles will be "digital first" and updated on an ongoing basis, with print only becoming available through rental. Pearson says the shift to “digital first” will drive benefits in content delivery, speed and cost, and further facilitates the company’s move from ownership to subscription based access models.

Overall, in North America, underlying revenue increased 1% to £1,209m (2018: £1,223m), with growth in OPM, Connections Academy and Professional Certification, more than offsetting the expected declines in US Higher Education Courseware and Student Assessment. The disposal of Pearson’s US K-12 Courseware business to Nexus Capital Management in March 2019, negatively impacted H1 revenue in headline terms.

In OPM, Pearson says H1 revenue grew well with enrolment growth of 13% on a global basis and the launch of 40 new programmes. Globally Pearson now offers 364 programmes, of which 335 are in the US. Pearson says the OPM market is projected to grow to $5.6bn by 2024.

In North America, Pearson’s OPM business grew enrolments by 11% to 216,000 students. Pearson says US online enrolments are growing and are expected to accelerate. During the first half year, the company signed ten new programmes and renewed seven programmes.

Connections Academy, the company’s US virtual schools business which partners with charter boards to run fully online schools, grew enrolments 11% in the first half year across existing full-time schools and new schools. At 30 June 2019 the business served 70,000 Full Time Equivalent students through 37 continuing full-time virtual partner schools in 28 states. Six new full-time online, state-wide partner schools are scheduled to open in the 2019-20 school year. Combined with a contract exit in North Carolina this will bring the total partner schools to 42 in 28 states, Pearson said.

In Professional Certification, Pearson says first half revenue grew well, driven by an 8% increase in test volumes to 8.7m, the ramp-up of new contracts and the renewal of existing contracts. Pearson's Professional Certification business partners with more than 450 credential owners across the globe and is the market leader in a market valued at around $1.2bn. Pearson VUE has 20,000 worldwide testing centres.

In North America, revenue growth benefited from IT certification and nursing and the continued ramp-up of new contracts in networking, online retail and teaching. In total, Pearson VUE signed 17 new agreements and renewed 30 existing contracts in H1. Pearson says its renewal rate on existing contracts continues to be over 90%.

In Core, Pearson says Professional Certification revenue was up due to good volume growth in the DVSA test in the UK, higher IT test volumes in Australia and good volume growth in the MOI (French driving test) which launched in late 2017.

In English Assessment, Pearson Test of English Academic (PTEA) grew global test volumes by 18% in the first six months with a strong performance in Australia, driven primarily by the use of PTEA to support visa applications to the Australian Department of Home Affairs. In India and China, test volumes increased 16%. During H1, 179 new universities began accepting PTEA, Pearson said.

PTEA is number three in the Study and Visa global market – estimated to be worth around $1.3bn - behind IELTS (Cambridge Assessment, British Council and IDP Education) and TOEFL (ETS).

In Pearson’s Core reporting segment, the 6% increase in underlying first half revenue to £403m (2018: £383m) was due to  growth in OPM, PTEA, Professional Certification, and growth helped by phasing in Student Assessment and Qualifications, Higher Education Courseware (in UK and Australia) and the delivery of a new digital assessment contract in Egypt.

In UK Student Assessment and Qualifications, Pearson says good growth in GCSEs, A Levels, BTEC Firsts and Higher Nationals was partly offset by continued declines in Apprenticeships which will continue to impact the UK business in H2 2019. In May 2019, Pearson delivered the National Curriculum Test for the last time, marking 3.8 million scripts. Next year’s NC test will be administered by Capita who were awarded the new six-year £109m contract in 2018.

In Pearson’s Growth reporting segment H1 underlying revenue grew 2% to £217m (2018: £259m) due to a good performance in School Courseware in the Middle East and growth in PTEA and Professional Certification. The decline in headline terms was primarily due to the disposal of WSE. 

Pearson:

Financial performance by geographic markets

Six months ended

30 June

2019

£m

2018

£m

CER

Growth

Underlying

Growth

North America

 

 

 

 

Revenue

1,209

1,223

(7%)

1%

Adjusted operating profit

79

64

13%

11%

Core

 

 

 

 

Revenue

403

383

5%

6%

Adjusted operating profit

31

10

200%

190%

Growth

 

 

 

 

Revenue

217

259

(15%)

2%

Adjusted operating profit

9

11

(18%)

50%

Total

 

 

 

 

Revenue

1,829

1,865

(6%)

2%

Adjusted operating profit

119

85

 

 

Note: Total adjusted operating profit does not include the contribution from Penguin Random House which in H1 2019 was £25m (2018: £22m).


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