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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Miss Expectations's picture

Something doesn't sound right here.  Is this all about falling book sales?  Pearson education materials and testing (COMMON CORE) was always about ditching books and going digital, so this transition was part of the plan.  Here's an excerpt of a good article about Common Core, its backers (profiteers) and its goals:

Critics of the CC curriculum complain that the changed focus on educational material is designed mainly to get children ‘work-force’ ready and will not prepare them any better for college. CC dedicates its agenda to insuring that children spend much more time on a computer-learning curriculum and evaluation that directly takes educational value away from the teachers. One proponent of CC stated that Common Core will “erase the need of the # 2 pencil.”

Much of the CC curriculum is being created for greatly increased online learning as funding is made available from the federal and states to upgrade computers so that all will have access. The Obama administration announced in July of 2013 that they may raise taxes on everyone’s phone lines by about $5 per year to increase K-12 tech subsidies because most schools cannot currently administer the computerized Common Core tests coming out in 2015 due to bandwidth constraints.

President Obama announced the Federal Communications Commission (FCC) will likely overhaul the schools and libraries universal service support program, commonly known as E-Rate. He also asked the U.S. Department of Education to use federal funding to give teachers more training in using technology. Established in 1996, E-Rate charges telecommunication companies for long-distance service, including cell lines, and uses the money to subsidize, among other things, school requests for phone lines, broadband Internet, and internal networks.

The nonprofit Education Superhighway has sampled K-12 schools’ connectivity levels and bandwidth speed nationwide through 350,000 tests in 18 states, for a representative sample of 15 percent of U.S. schools. Their research shows approximately 59 percent of schools have enough bandwidth to administer basic computer tests, but only 23 percent have enough bandwidth to handle online tests and textbooks.

Even fewer will have sufficient bandwidth for the tests by 2017 based on projected growth of use. No Common Core tests will be available offline starting in 2017-2018.

Pearson PLC, London England (PSO: $ 17.55 Billion market cap) — Pearson is the world’s leading education company. From pre-school to high school, early learning to professional certification, our curriculum materials, multimedia learning tools and testing programmes help to educate millions of people worldwide – more than any other private enterprise. Pearson’s Common Core System of Courses is the first all digital, tablet based English Language Arts and math curriculum created from the ground up to meet the intent of the Common Core Standards.

Tactical Joke's picture

Pearson's software sucks. It's user hostile, and just flat out pisses off everyone who is forced to use it. Not surprised at all.

Miss Expectations's picture

I've heard this from many teachers.  Last year school class scheduling had to be done on spreadsheets and entered by hand.  This was a huge problem and impacted an entire school system. They barely got scheduling done before the first day of school.   It was a nightmare.  The functionality SUCKS.

koan's picture

Good riddance, these folks are one reason I support piracy.
Fuck you and your book prices.

Miss Expectations's picture

I don't think we'll be rid of Pearson...they are merely in the messy part of their planned transition from books to digital.  I think that we are seeing what happens when they turn off one system and turn on the new one.

TradingTroll's picture

Their competitor, Thomson Corp., was diversifying into databases in the 90s and shed many of their newspapers.

Then they bought Reuters.

Pearson is a dinosaur. 25 years late on software and will probably be late to their own funeral

DrBrown's picture

Higher Ed has turned into nothing but a scam!

UmbilicalMosqueSweeper's picture

Surprised? Most Americans can't read.

reader2010's picture

Amazon has taken its biz away.

GreatUncle's picture

What will the world do without Google search in it! Oh my god ... the poor snowflakes and their IOT.

I always hedge from the time of power rationing.

When that goes the IOT is gone ... that little old bookshelf on the side here got books on science and maths all available as a resource to carry on in paper.

Short human society, no books, internet removed to stop people objecting and communicating those objections.

Pull the dumb switch now please.


angry_dad's picture
angry_dad (not verified) GreatUncle Jan 18, 2017 10:35 AM

You can see the dumb switch was fully ON in 20 states last November.

JimJinNJ's picture

I teach several courses at a 2 yr college.  the textbook situation is a scam not unlike the inability of fed govt to negotiate pharma prices.  I happen to teach psychology--that discipline (other than neuroscience) changes at a glacial pace.  why do we require students to buy a new edition (nice new cover color of course) esp for a survey course.  and what's more, there are fine free, online texts available.  higher education is a scam, a bubble and obscenity. 

angry_dad's picture
angry_dad (not verified) JimJinNJ Jan 18, 2017 10:34 AM

Most textbooks go unused by students who rely on apps and google.

Eventually they sell who their unused books  to consolidators who in turn sell them back to book binderies.

These used books are rebound, a few cover sheets added, and then sold AS NEW for $HUNDREDS next year.


angry_dad's picture
angry_dad (not verified) Jan 18, 2017 10:31 AM

Thanks to decades of DC mismanagement, most gringos "graduating" from usa schools can't read anyway.

Scientific facts, historical truths, and the ability to determine good from bad, right from wrong, and problem solving have all been extinguished by the nanny state.

The nanny's will tell you what to think,,, right cankles?

The charter school system has been created to monetize the complete failure of the corrupt politician controlled public school system

Blaming the teachers , the unions, and academic curriculum is the devil's greatest trick.

brooklinite8's picture

I am not a big fan of current for profit, liberal touting, safe space seeking, rent seeking, over priced bs sold at the universities these days. Although I would hate to see a Google or Amazon University I would like technology to disrupt the structure of the current universities. 

silverer's picture

Well, your unprecedented business decline comes from people like me, who refused to send my kid to political indoctrination courses for $100,000. That's not something I would buy a textbook for. Sorry. Get a real job, or fix the Marxist indoctrination centers to teach again.