Pearson has reported a massive pre-tax loss for the year of £2.6bn this morning (24th February), including a goodwill impairment, following the challenges it has been facing in the US education market. The company, which in January delivered its fifth profit warning in four years, also reported a sharp rise in debt to £1,092m (2015: £654m). Meanwhile, Penguin Random House adjusted operating profits for Pearson's 47% stake in the trade publisher were £129m for 2016, up 43% in terms of headline growth (23% in underlying growth) from £90m in 2015.
Sales at the educational publisher fell by 8% to £4,552m in underlying terms for the 2016 year, and adjusted operating profits of £635m were down 21%, a result Pearson said "hit 2016 operating profit and eps guidance". 2017 guidance is for operating profit of £570m to £630m, with adjusted earnings per share of 48.5p to 55.5p.
However, Pearson's share price jumped marginally this morning, with 2016 operating profits and eps slightly better than its January 2017 guidance. The company has been struggling in its core US education market after students began renting textbooks instead of buying them.
Pearson chief executive John Fallon said the goodwill impairment did not affect Pearson's cash flow or the money it has to invest in the company. He also emphasised it is paying $550m debt back early and the £750m it is investing this year to ensure Pearson will emerge as "the winner in digital education".
Fallon said the company would look at cost savings this year "urgently". The publisher also revealed it had initiated processes to explore potential partnership for its English language learning business Wall Street English (WSE) and possible sale of its English test preparation business Global Education (GEDU).
Pearson chief financial officer Coram Williams said it was "really too early" to give any more details about the sale of its 47% stake in Penguin Random House, announced last month, as a process that could take "a number of months". Pearson said the decision to sell its share was "strategically driven" after it decided to focus on education publishing as early as 2012.
Pearson also reported that Penguin Random House adjusted operating profits on its 47% stake were £129m for 2016, up 43% in terms of headline growth (23% in underlying growth) from £90m in 2015, despite a revenue decline. Sales at PRH dropped after a very strong performance in 2015, which was boosted by the success of multi-million sellers such as E L James' Grey and Paula Hawkins' The Girl on the Train and due to the anticipated industry-wide decrease in e-book purchases following the new agency agreement reached in 2015.
PRH benefitted from "strong sales" of The Girl On The Train in its second year of publication, selling over 3m copies in multi-formats in the UK, and Jojo Moyes's Me Before You and After You, cumulatively selling more than 2.5m copies in the UK. The division's top-selling hardback in Britain was Night School by Lee Child and the top-performing children's franchise was Roald Dahl and the 10th volume in Jeff Kinney's Diary Of A Wimpy Kid series. It also noted the "broad resilience" of print books, including growing print sales online, as well as increased demand for audiobooks. Pearson said it expected a "broadly level publishing performance" for PRH in 2017.
The money from Pearson's sale of PRH would be used to strengthen Pearson's balance sheet, the company said, as well as investing in the business and returning excess capital to shareholders.
Pearson also said the restructuring it carried out in 2016, where it reduced 10% of its global workforce, had been delivered on in full and was reducing Pearson's cost base by £425m (at a cost of £338m). In the UK, the company made approximately 500 people redundant, and it has since said it will be moving staff out of Edinburgh Gate to a location "better suited to our means".
Fallon said online degree partnerships represented the company's "most exciting long-term opportunity", having signed with more than 45 universities around the world, including forging recently a new UK partnership with Manchester Metropolitan. More than half (26.4 million) of its total US school tests are now taken on-screen, he said. Digital and services revenues for the year marginally grew, now making up 68% of Pearson's total revenues (2015: 65%).
The transition to digital was described as "more difficult and disruptive than we thought it would be" but one that would ultimately make Pearson "more sustainable, more efficient and gain a more attractive margin in cash characteristics as well". The company reitterated its aim to reach a ratio of 75% digital by 2025.
Fallon said: "We're going to continue to accelerate the digital transformation, we're going to continue to simplify our portfolio to control our costs and invest in the opportunities in education.
"We recognise this has been a tough few years. But we are the global leader in education. We do have the scale and the focus. We are investing in our digital transformation and we are determined to emerge as a winner in digitial learning. We're going to sharpen our focus, we're going to to create a simpler, more efficient, more digital business that lets teachers choose and gets Pearson growing again and we will get there just as quickly as we possibly can."