Pearson sales down 7% after third quarter

Pearson sales dropped 7% year-on-year in the first nine months of 2016 as the company's c.e.o John Fallon again described market conditions as "challenging".

The results are in line with the company's half-year results, which also saw a 7% drop.

The fall in revenue was attributed to expected declines in UK and US assessment businesses, as well as "cautious buying patterns" among US college campus bookshops, which it said were managing their own supply chain and inventory "more efficiently". Fallon refered to it as a "temporary phenomenon" and pointed out there was no fundamental change in the buying behaviour of students or the propensity of professors to adopt its books.

Pearson maintained its forecasts for the current financial year - it still expects adjusted operating profit to be between £580m and £620m and earnings per share of between 50p and 55p. The company said it is also still "on track" to meet its 2018 growth goal to reach £800m operating profits by 2018.

Earnings per share are projected to be 4.5p higher if current exchange rates persist, and in headline terms its sales are only down 3% because of the strength of the US dollar against sterling. Fallon has previously said Pearson was in a "strong position" to weather the uncertainties posed by Brexit with more than half of its revenues from the US, in dollars. 

Pearson has rolled out "very tight cost management" measures across the company since January and its restructuring program to make £350m savings over two years is now 90% complete, the company said. It had aimed to cut a tenth of its global workforce, accounting for 4,000 redundancies. According to c.f.o. Coram Williams, Pearson also continues to consolidate its real estate, with the closure of 19 office properties from around the world. Meanwhile a new finance system also went live in the UK in its third quarter.

Pearson said it was beginning to realise the benefits from systems integration and warehouse consolidations following the merger of Penguin Random House, and this was was "softening the expected impact of reduced demand for e-books" after last year’s changes to digital-terms. PRH was said to have benefited from million-copy multi-territorial film-tie-in sales for The Girl on the Train by Paula Hawkins, Me Before You and After You by Jojo Moyes, and The BFG and other classics by Roald Dahl, as well as from sales of The Underground Railroad by Colson Whitehead and John le Carré’s The Pigeon Tunnel. "The fourth quarter [for PRH] will benefit from new fiction, nonfiction, and movie tie-ins across all formats from bestselling and prize-winning authors," Pearson said.

Fallon said the challenges Pearson faced would be offset by growth in digital from Pearson and a number of growing intitutional partnerships with universities. He said he was "very, very excited" about long-term growth for REVEL, a higher education digital product that replaces the printed textbook and tracks students' time spent on reading assignments, reporting registrations had "almost doubled" compared to the previous year. Another growth area for Pearson is its online program management business (OPM). While the bulk of the division's revenue is derived from the US (where it provides courses at more than 40 universities), it has already begun to extend its offering to the UK. It struck a deal with King's College London to provide an online psychology masters and law program, and has several more contracts "in the pipeline". The courses are hosted on an online platform, offering video conferencing and message boards. Fallon reported course registrations had grown this year by 22% in comparison to 2015. Last year its online degrees brought in £223m in revenue.

Pearson has had four profit warnings in three years under c.e.o. John Fallon, under whom Pearson shed both the FT and the Economist to focus "100%" on education. Its revenues have suffered due to "cyclical and policy related factors" after employment has risen at the expense of college enrolments in the US, its biggest market, over the past five years. In the UK, profits have been hit by changes to BTEC regulations. The cumulative cost to profits was £230m per year, according to Fallon at Pearson's a.g.m. at the end of April during which he was taken to task by disgruntled shareholders. Fallon said he expected enrolments to stabilise over the next few months and to grow again.

Today (17th October), Fallon said: "Our competitive performance remains strong in a tough market. We have achieved more than 90% of the growth and simplification restructuring programme we announced in January.

"While market conditions continue to be challenging, particularly in higher education, thanks to tight cost management we are on track to deliver our guidance this year, and to achieve our long term growth goal."