Pearson's first quarter is a seasonally quiet one.
However, the shares rose 3.5% following the quarterly update, which confirmed a 1% increase in underlying sales, and reiterated existing targets.
Digital content is replacing paper the world over, and Pearson believes that will be the case in education too. The group is transforming itself from staid publishing house to trailblazer in the emerging world of digital education content.
The Economist and Financial Times are long gone, and a chunk of Penguin Random House recently followed them out the door. CEO John Fallon was confident that the proceeds from these sales would mean Pearson could cover the costs of the restructure and maintain the dividend while still emerging a leaner and more profitable organisation.
This sounded like an excellent outcome for shareholders, but the sales removed the main safety net should there be a wobble. You can probably see where this is going.
Rather than a failure to get to grips with online specifically, that wobble was the result of weak demand for traditional courseware in North America. Unfortunately for investors, the decline was of 'unprecedented' size, and Pearson had to revaluate its stance on holding the dividend steady.
While the group is still targeting a sustainable and progressive dividend, this is going to be from a significantly lower base. The dividend was sliced by two thirds from 52p to 17p at the full year stage. Going forward, the prospective yield is 2.2%.
Recent updates have brought more positive news. The US is still a tough market, but we're getting significant growth in the digital sphere. Competition from free online alternatives is said to be having less of an impact than the group had expected, and much less than sceptics had feared.
Nonetheless, we'd hesitate to say the shift to digital has been vindicated. Not only does the group still need to prove it can establish itself in this new sphere, it'll need to prove it can do so in a robustly profitable way.
The rewards could be great, but a few things need to go the group's way for those rewards to be realised.
First quarter trading details:
The North American market remains challenging, but revenues rose 3% as lower gross sales were offset by lower returns, and progress in Online Program Management (OPM).
In Core, which includes the UK, Italy and Australia, revenues were up 6%, boosted by changes in the phasing of sales, but with solid growth in Pearson Test of English and OPM.
In Growth markets, revenues fell 12% on the prior year, which benefitted from unusually strong orders from South Africa. Excluding South Africa, sales rose 1%, driven by China and Brazil.
Net debt fell by £500m year-on-year to £600m, but is slightly higher than the year end, reflecting the cost of the recent share buyback.
Pearson's cost efficiency programme is on track to deliver savings of £300m a year by 2020, with £95m of cumulative savings by the end of 2018.
Guidance for the year remains unchanged. Pearson expects operating profits of £520m to £560m, and adjusted earnings per share of between 49p and 53p.
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