Pearson is expecting its full-year operating profit to come in at the top half of its forecast range, it revealed today (17th October) while giving its third quarter trading update. At the same time, the company revealed Penguin Random House had performed “in line with our expectations, with revenues down slightly" during the period.
Pearson has recently struggled in US higher education market and issued its fifth profit warning in four years in January. But on Tuesday the company said it now expected 2017 adjusted operation profit to come in between £576m and £606m, higher than the previous guidance of between £546m to £606m. The reason, according to c.f.o. Coram Williams, is Pearson's performance in US higher education, which is in line with the performance it needs for profitability to be in the upper half of the range. “By definition, that means the rest of our business is performing in line with expectations," he said.
Whilst declaring Pearson’s strategy “on track” and today’s announcement “encouraging”, chief executive John Fallon said there were still "tough conditions" to tackle in its core business and “still a long way to go” for the company. Although consistent with Pearson’s upper-half guidance range, its third quarter revenues at nine months were down 2% in underlying terms, with sales in its biggest business, US higher education courseware, down 1% in underlying terms. This was due to "expected declines in North America in school assessment, school and higher education courseware, and the retirement of LearningStudio", the company said. However, following the slashing of e-book rental prices for over 2,000 titles, e-book revenues in the first nine months of 2017 jumped 24%, and overall digital sales in US higher education are up 11%.
Of Penguin Random House - in which Pearson now has a 25% stake, after finalising the sale of a 22% stake in the business to co-shareholder Bertelsmann on 5th October - Pearson said the publisher had performed “in line with our expectations, with revenues down slightly”. It noted “broadly stable” sales of print and audio books and “ongoing modest declines” in demand for e-books, as well as benefits post-merger from “annualisation of integration synergies”. Authors John le Carré, Ken Follett, Sue Grafton, John Grisham and Jamie Oliver were among those named as benefitting PRH's performance in the third quarter.
Following the sale of 22% of its stake in PRH to Bertelsmann, Pearson said it expected to start returning £300m in surplus capital via a share buyback soon. Net debt for Pearson at the end of September 2017 was £1,312m (2016: £1,365m).
Fallon said: “We continue to invest in growing market opportunities, gaining share with our digital transformation, and becoming simpler and more efficient. With good cash generation and a strong balance sheet, we are going to return £300 million in surplus capital through a share buyback.
“We expect tough market conditions in our biggest business to continue over the next couple of years. We’re focused on being the long term winner in digital learning and creating sustainable value for our shareholders.”