Pearson nine month Trading update - the takeaways

1.??????A few things about the structure of the Trading Update. Firstly, Pearson only reports percentage changes, not actual revenues. Secondly, unlike last year’s nine-month (9m) trading update, there are no quarterly splits provided (Q1 / Q2 / Q3). As a point of note, Pearson’s Underlying Sales Growth (“USG”) was down 10% in Q3 2020. Thirdly, Pearson has changed its divisional reporting structure so there are no direct comparables at a divisional level from last year in the statement. There is a virtual presentation at 8:30am London time).

2.??????First of all, Pearson has stated it is on track to meet Full Year market expectations. Although no figure is provided as to what the market consensus it, at the 1H results, Pearson did state the FY21 adjusted operating profit consensus was ￡377m at an exchange rate of $1.36 / ￡1. One small point is whether market expectations have been adjusted for currency rates as the bulk of Pearson’s revenues are in USD, consensus estimates do fluctuate with consensus.

3.??????As there are no quarterly splits and no actual revenues (although the latter would have a distorting currency effect), it is hard to determine what exactly is Q3 2020’s performance as there is some seasonality (particularly in US Higher Education). However, it looks like Pearson’s USG was down mid-single digits (-4% to -5%) in Q3 given the nine months was +10% USG vs +17% in 1H;

4.??????Probably the area that will gain most focus is the one that has for a number of years, namely US Higher Education revenues, which historically has been a high margin business and whose decline over the past 7-8 years was responsible for much of Pearson’s problems. Q3 looks to have been tough: Pearson stated USG fell 9% for the 9 months vs a 2% decline in the first half. Q3 is more important for Pearson given it is when students return to school, although the shift to digital has lessened some of the timing effect. Nevertheless, the numbers suggest Pearson’s USG might be down close to, or even above, 20% in Q3. That would probably be worse than last year (it is not a direct comparable but North American Higher Education Courseware revenues fell 15% USG in Q3 2020);

5.??????Pearson did state it believes there has been a decline in enrolments at US Higher Ed institutions, particularly in the two year Community Colleges (CC) space, where historically it was strong. It is blaming this on both Covid restrictions and the tightening labour market in the US. Given the latter shows no signs of easing, that suggests these headwinds will continue, especially at the CC level. On a brighter note, Pearson’s Inclusive Access business (where Pearson sells the textbooks to the institution, not the student directly) up 21% for the 9m vs +23% in 1H;

6.??????On Pearson+, Pearson’s new D2C learning tool, the company has reported more than 2 million registrations with the wording suggesting over 100,000 paying subscribers (students have to sign up for a minimum of 4 months). Pearson+ is the company’s key to long-term sustainable growth, as the intention is to develop its offering from Higher Education into Workforce training. It is early days but the registration number suggests significant interest, which is positive;

7.??????For the rest of the divisions, the picture is somewhat mixed. In Virtual Learning, which comprises of Virtual Schools in the US and Online Programme Management (OPM) where Pearson runs the online courses for universities, Q3 USG looks to be down high single digits (1H USG +25%m 9m USG +14%). Enrolment in Virtual Schools looks to be slightly better than what was forecast at the 1H results but yield looks to be down. In OPM, Pearson stated, ex-discontinued programmes, USG rose 8%. However, I think ex-discontinued programmes is not the best metric as it would be expected churn to be ongoing, not one-off in nature;

8.??????In English Language Learning, revenues continued to be impacted by the Australian borders being effectively closed (Australia is the main market for Pearson in ELL). However, reference was also made to its China business being impacted by the regulatory crackdown so it is clear Pearson has been caught up in the regulatory issues.

9.??????Elsewhere, Workforce looks to have had healthy Q3 USG of high-single digits (+5% 9m USG, +4% 1H), which is a positive as this is an area where Pearson may see the greatest potential opportunity over the long-term. Again, as with other divisions, there are some pluses and minuses but overall the performance looks good, especially off tough comparables from Q3 2020. Assessment also had a strong performance in Q3, probably up mid-teens year on year in USG (+24% USG 9m, +29% 1H USG) with a strong rebound in US Clinical Assessments and helped by phasing benefits at US Student Assessment;

10.??Pearson confirmed it is moving onto the next stage of its disposal programme, marketing its international courseware local publishing businesses so there should be some more announcements coming up over the next few months. Pearson completed the sale of ots Brazilian K-12 Sistemas business on October 1st. ?

All thoughts and comments welcome. Also, as usual this is not investment advice.