World's Largest Education Company Crashes After Dire Warning, Warns Of "Unprecedented" Business Decline

Tyler Durden's picture

British education group, and the world's largest education company, Pearson PLC lost a quarter of its market cap in an instant this morning after it issued a dire warning about the state of the textbook business, cut profit forecast, and warned of an "unprecedented" decline in its North American business. It also put its stake in the iconic Penguin Random House book business for sale in a bid to raise cash, not long after selling the Financial Times to the Nikkei.

In an unscheduled update ahead of its full-year results in March, the former owner of the Financial Times said it was revising down its prior operating profit goal for 2017 and rebasing its dividend this year after a sharp slump in an arm of its American business. Pearson said its North American courseware market was “much weaker than expected”, with net revenues falling 30 per cent in the fourth quarter, taking the overall yearly decline to 18 per cent. Operating profit in 2017 will be 570 million pounds to 630 million pounds, the London-based company said in a statement, below the average analyst estimate compiled by Bloomberg of 702.9 million pounds. The world’s largest education company withdrew its profit goal for 2018 after sales of materials for U.S. higher education dropped 30 percent in the fourth quarter.

“Whereas we had previously anticipated a broadly stable North American higher education courseware market in 2017, we now assume that many of these downward pressures will continue”, the company said. Furthermore, while Pearson said it expected 2016 operating profit in line with guidance, it scrapped its 2018 profit goal.

Chief executive John Fallon said Pearson was taking “more radical action to accelerate our shift to digital models, and to keep reshaping our business”.

“The education sector is going through an unprecedented period of change and volatility. We have already taken significant steps on restructuring, reducing our cost base by £375m last year”, said Mr Fallon.

The stunned market reacted quickly, and the company lost about a quarter of its market cap in minutes at the start of Wednesday trading. The shares were then halted on volatility after continuing their decline as analysts peppered executives with questions about their business and the industry on a conference call that extended past an hour. The company’s enrollment projections were too aggressive, Chief Financial Officer Coram Williams said on a conference call. Pearson sank to 585.5 pence in early trading in London, cutting the company’s market value to 4.81 billion pounds ($5.9 billion)

Pearson's sudden capitulation contrasts with months of optimistic statements CEO John Fallon about the challenges Pearson faces in the U.S., where college enrollments and its testing business are down, and textbook sales unexpectedly declined, Bloomberg reports.

“It’s a difficult time for Pearson,” Fallon said on the call. The company is seeking to build a more sustainable and growing digital business, he said. “We’ll manage our balance sheet so we can sustain the company through this challenging transition.”

Despite record amount of student loans in the US, fewer older students are enrolling, community college admissions also are dropping, and more students are renting textbooks.

The company will also issue an exit notice over its 47% stake in publisher Random House to JV Bertelsmann, Europe’s largest media group by sales, “with a view to selling our stake or recapitalising the business and extracting a dividend”. The Penguin stake may raise as much as 1.2 billion pounds, according to Ian Whittaker, an analyst at Liberum Capital. Pearson will use it to strengthen its balance sheet and return excess capital to shareholders, the company said.

The dividend, which amounted to 52 pence a share for 2016, will be cut beginning this year to reflect the lower earnings guidance. The current dividend equals 6.4 percent of Pearson’s share price, the highest yield among companies in the U.K.’s benchmark FTSE-100 Index.

As Bloomberg adds, analysts have been questioning the health of Pearson’s education business since last year. Neil Campling, an analyst at Northern Trust Securities, called the announcement “the warning we’ve been expecting,” in a note on Wednesday. “The higher education business declined further and faster than the company expected in 2016 although in light of the plethora of negative data points we have highlighted throughout the year we are not surprised,” Campling wrote. “The North American higher-education courseware market essentially collapsed in the critical fourth-quarter back-to-school season.”

Pearson combined Penguin with Bertelsmann’s Random House in 2013, leaving the British company owning just under half of the venture, which publishes books from writers including John Grisham, Ken Follett and George R. R. Martin. In 2015, it generated revenue of 3.7 billion euros ($3.95 billion) and operating earnings before interest, taxes, depreciation and amortization of 557 million euros.

 

Random House, the world’s largest book publisher. The German company is open to increasing its stake in the venture “provided the terms are fair,” CEO Thomas Rabe said in a statement. “Strategically this would not only strengthen one of our most important content businesses, it would also once further strengthen our presence in the United States, our second largest market,” Rabe said.

Pearson gets almost all its profit from education after already selling the Financial Times and its half of the Economist Group. The company announced a reorganization last year as it seeks to address sluggish demand in its main business.

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RattieNomNom's picture

breaksit is most important meal of the day!

JamesBond's picture

Fewer ESL programs and books needed...

 

jb

Arnold's picture

That's not gonna buff out.

Bondo, stat!!!!

Haus-Targaryen's picture

I love charts that look like that. 

ParkAveFlasher's picture

Looks like a job for Wile E. Coyote and his assortment of Acme products.

But this is what happens when African Lesbian Spool Counting courses are no longer funded by loans shoveled into the marketplace.  Another .000001% rise in interest rates and Rhode Island implodes.

slainte

Arnold's picture

Firm decision making, a clear trend.

Charter schools, a trend, your friend.

bamawatson's picture

trend you say

https://m.youtube.com/watch?v=vm70YgsQCHw
we dont need no stinking text books

Croesus's picture

I guess their books on building and maintaining a business were outdated...

NoDebt's picture

A maker of paper texbooks in a digital age is seeing persistent declining sales?  Get the fuck outta here.  You're kidding me.

Who wouldn't want to plunk down $300 for a paper textbook about basic chem or finance or engineering that you get to keep on a shelf for the rest of your life because there's a new version put out every year making yours obsolete?

 

ParkAveFlasher's picture

Because the laws of physics change every semester.

Kprime's picture

I knew they were lying when they tried to tell me gravity was a fundamental law.  Ha! they made that shit up.

ParkAveFlasher's picture

What we need is a book-buying algorithm to clear stagnant inventory at closeout prices, with the low profitability offset by "funding" by another algo-driven equity-price-allocator mechanism, kind of like Amazon plus ppt.  oh wait

froze25's picture

As does the curriculum for "Lesbians of Color in modern America".

Skateboarder's picture

I'm a liquid but identify as an anisotropic solid, i.e., I'm state-fluid.

You will accept my duality as truth.

ParkAveFlasher's picture

I would say you're going against the grain.

SubjectivObject's picture

Equiaxed

It's the new, fashionable, state of being.

MrSteve's picture

Did you mean "plasma"?

Miner's picture

I'm insulted!  I sexually identify as an anisotropic solid.

hannah's picture

'Because the laws of physics change every semester.'....i know you are joking but in actuality with the way 'government' science changeds the results to match the 'expected' outcome...the laws of nature are changing every year now

Scuba Steve's picture

He meant it stored in a PDF on a thumb drive .... along with ALL the PDFs needed for the FULL 4 year degree.

College Professors needed, myth busted.

MsCreant's picture

I almost never have them buy books any more, all of their materials are posted on-line, so are all of the notes, study guides, etc.. It took me a lot of time to redesign my courses, but it was worth it. I got angry when, one semester they changed an edition of a text book on me and it ran the cost to my students up $100. I told my students to get their money back that day and started finding readings on line and emailed them to them as the course unfolded over the semester. I am always looking for good, free, legal, readings. JSTOR is an excellent resource. Lots of classic texts are online free.

Fuck these people.

Ex-Oligarch's picture

Well done!  If only more profs would take the initiative and make the extra effort to do this...

Textbooks are largely a matter of convenience for the teacher.  The best classes I ever took relied on primary sources and journal articles as readings.  That was three decades ago, and involved a lot of xeroxing and visits to the library to use reserve materials, but was absolutely worth my time as a student.

Skateboarder's picture

They shouldn't be, but textbooks are a racket.

And fvck the professors who force students to get the latest version every year.

Plus, sometimes they are full of lies...

nmewn's picture

"And fvck the professors who force students to get the latest version every year."

No used books for you!

Seems to me like the very least they could do is point the kids in the direction of the nearest loan officer conveniently located on campus.

Oh...wait, that might be like a conflict of interest or sumpin ;-)

NoPension's picture

Higher education is a racket.

Education can be (is) digitized and online. Could be FREE or damn near free. And up to the second, current.

I'm for independent, tightly verified testing centers. Where, for a modest fee, ANYONE can sit for a test. And...if you pass the requisite tests, you get a degree.

froze25's picture

It is free it's called the library and Internet, the piece of paper that is required for must jobs called a diploma from a acredited university cost an arm and a leg. Thank God many businesses are waking up to the fact that diplomas are over rated.

nmewn's picture

But what about the Faaarrreee! group-think indoctrination courses that come with the applicant being accepted as an on-campus student? They're going to miss out on that!

And...the beer pong ;-)

Skateboarder's picture

Major in beer pong, minor in flip cup and beer bong, broheim.

A+ in theory of chugging beer, C+ arithmetic breh - totally passed that shit.

curbyourrisk's picture

Professors supplement their income by requiring new textbooks every year because one or two words were change...or updated.  OH...  who wrote the textbook?  Oh yeah.  the same professor requiring all students to ONLY use the most current version of the scam.

 

Infnordz's picture

Frankly most physical media is pretty much obsolete, except for some legal/historical/art uses (so I still get some bills on paper).

Digital media removes the need to carry heavy and bulky media/files for education-courses/work/entertainment and removes the need for bulky storage structures too, including all optical media, even Blu-Ray. As a University student it was a pain having to carry all that bulky weight around.

I've been busy migrating most of my physical media to digital forms on ZFS FreeNAS, not risky cloud, because I can no longer justify the wasted space and poor access/search for physical media.

Cole The Bar's picture

Pearson can go fuck itself in its fat fucking ass. They financially rape students as it is.

Sincerely, a guy who did the whole 4 year degree thing.

dogsandhoney2's picture

yep, nothing like corporate profit ethics.
woof.

Arrest Hillary's picture

Black Lives Matter don't buy books .... can't read 'em ?

Troy Ounce's picture

 

 

Dont worry, I already have a book.

Kprime's picture

ha ha ha, sucker, I have 3 books.  I'm thinking about investing in a shelf.

Troy Ounce's picture

 

 

I understand, you like paper. Ugh

Kprime's picture

when the great reset arrives, I will still be able to wipe my ass.

Troy Ounce's picture

 

 

I have news for you. You CAN wipe you ass with gold.

AND you can eat gold: ediblegold.com

Goldbugs always win.

Scuba Steve's picture

Yes, but will you eat it after wiping your ass with it?

Its what separates the Goldbugs from the idiots :)

Arnold's picture

My neighbor used to be a bookie.

He's out of the business too, 'cause he's dead.

UmbilicalMosqueSweeper's picture

My bookie had a "heart attack."

NewHugh's picture

Soros will be running the school textbook publishing operations for the USSA to ensure that indoctrination is proceeding as planned...

BennyBoy's picture

 

Kids are smart.

Stopped going into huge debt to get a useless degree so they can live in their parents basement and wait tables as they default on student loans.

gatorengineer's picture

^^ This.  They have realized they can wait tables for 40K a year without a 150k College Diploma....

An RN is now a 2 year degree, you either get that or a teaching ticket, pretty much anything else is worthless.

Some would argue engineering but that is a very very thankless job, with long hours, and constant offshoring.....  I know

Sky flyer's picture

Shouldn't be much demand for textbooks after martial law starts.

SubjectivObject's picture

They're great for lining windows against bullets.

Even better with a layer of kevlar in the middle.

CRM114's picture

"So,why does the physics department need this Class 4 laser and a rifle scope..and night vision gear?"

"Er....it's the new optics course."

Dungeness's picture

"You must unlearn what you have learned" -Yoda

https://m.youtube.com/watch?v=z4jeREy7Pbc