Pearson plunges to 18-month low after warning on weak US courseware

Pearson PLC (PSON) issued a profit warning on Thursday after seeing weaker trading in US higher education courseware business.

The FTSE 100 educational publisher said it now expects adjusted operating profit to be at the bottom of the guidance range of £590mln-£640mln.

READ: Pearson encouraged by stabilising sales as digital shift accelerates

Revenue from US higher education courseware, which represents around a quarter of turnover, has fallen roughly 10%.

The third quarter was “significantly weaker than we expected” in this area, said chief executive John Fallon.

“Whilst difficult in the short term this places more importance on our work to remake this part of Pearson and we are exploring new ways of deploying our new technology platform so that we can offer students highly affordable, convenient, adaptive, digital courseware.”

The proportion of revenue from digital courseware is seen rising to 65% of this from 55% last year, providing some encouragement of management’s digital-first strategy coming though.

Furthermore, Pearson said it remained “on track” to cut £330mln of costs on an annualised basis, with the full benefits accruing from the next financial year.

Fallon said he still expects revenue across the group as a whole to “stabilise this year, with encouraging growth in many parts of the company”.

Pearson shares fell 17% to 709.2p in early trading on Thursday, levels not seen since early 2018.

The tide is turning..against Pearson

Berenberg continued to take a dim view of the company, saying its recent ‘data scrape’ of online college bookstores suggests that Pearson has lost market share in the new academic season, and latest industry data confirms that students are “increasingly skipping paying for materials and shifting to those they can procure for free”.

“Group organic revenue growth may be improving, but not all revenues earn the same margin, and thus we continue to expect the group to miss on profit metric,” analysts wrote in a note to clients.

Berenberg‘s analysis of a selection of academic institutions suggests that enrolment declines are slowing but analysts said they “remain cautious as to the potential for the countercyclical upswing in student numbers when the recession finally arrives”. 

With Pearson’s latest study showing students in the markets to which it is most exposed, of the US, the UK, Australia, and Europe, see less and less value in pursuing a traditional academic degree, and see more potential in vocational studies.

“It may be argued that Pearson is addressing these issues…but we think the tide is turning towards vocational and life-long learning. Unfortunately, Pearson has little to no exposure to either of these segments.”

Story by ProactiveInvestors