UK based publishing company Pearson Education’s shares dropped nearly 8% last week after it flagged weak sales across its core business, the US education market. The company generates more than three-quarters of its revenue from education, and with the publication of textbooks and software for high school and university students and teachers, more than 60% of its total group sales comes from North America.
“Our trading and financial performance has been weaker than expected, particularly in North America,” said Chief Executive John Fallon.
Pearson’s Chief Financial Officer Robin Freestone said Thursday that the publisher’s core U.S. higher education business faces revenue pressure in a “difficult backdrop,” with key trends unlikely to improve greatly in 2014. These key trends include the consistent pressure from school budget cuts, declining student enrollments and a shift to online learning in North America.
“It has been that bit weaker in the third quarter than we hoped, and the fourth quarter was slightly disappointing,” Chief Financial Officer Robin Freestone said in an interview with The Wall Street Journal as higher-education margins were indeed hit in the fourth quarter—an important selling season for publishers.
Simon Zekaria writes in The Wall Street Journal that revenue declined more than 5% for the U.S. college publishing market in 2012 and in the first half of 2013 after more than a decade of growth, according to data pulled from the Association of American Publishers, cited by the brokerage firm Berenberg.
“At this point of the economic cycle in North America, higher-education enrollments decline—that is a trend that goes back to about 1947,” Mr. Freestone said. “There is an inverse relationship between economic growth and enrollments. But this is probably a more significant slowdown than we have seen sometime in the past.”
The CFO and Pearson have stated that it is expected that there will be results seen in 2015, with a target around £100 million of annual cost saving, which it plans to reinvest. It expects faster revenue growth, improving profit margins, higher spending and improved cash flow after its global restructuring is completed. It is expected that the full-year adjusted operating profit, before restructuring charges, will be about £865 million ($1.44 billion), lower than 2012’s £936 million. It was previously warned the figure would be lower year-over-year. The company also forecast full-year adjusted earnings per share, also before restructuring, at 83 pence, broadly in line with 82.6 pence recorded in the year-earlier period.
The company hopes to grow its influence in countries with fast growing economies. As Western education markets slow and the company’s global presence with language schools in countries such as China, Brazil and India, where learning among the middle class is booming, the company hopes to see revenue continue to grow as it has almost doubled between 2009 and 2012 in its emerging-market alongside more than $3 billion in revenue from its digital services.
Included in this was Pearson’s Financial Times newspaper whose digital subscriptions have grown, offsetting weak advertising sales and planned reductions in print copies.
Separately, Freestone said while the Financial Times newspaper is not a “trophy asset,” it is a “strongly performing business…. It is the best brand we have.”