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Pearson - acquires digital workforce education company

Pearson has acquired Credly, a digital workforce credentials and certifications company, for a total of $200m.

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Pearson has acquired Credly, a digital workforce credentials and certifications company, for a total of $200m. This includes an upfront payment of around $140m, Pearson's existing 20% stake in Credly worth about $40m, plus an additional amount to be paid following completion of the deal. The deal will be funded from Pearson's existing cash and available liquidity.

Over 2000 companies currently use Credly, and it ''offers an easy-to-use platform for organisations, companies, educational institutions and learners to award trusted digital credentials that verify an individual's skills and help connect them with the right opportunities''. In the year ending December 2021, Credly grew revenues by 47% to $13.3m, and delivered compound annual revenue growth of 42% from 2019-2021.

The business will sit within Pearson's Workforce Skills division.

Pearson shares rose 2% following the announcement.

View the latest Pearson share price and how to deal

Our view

Pearson is still suffering from declines in physical courseware. But the pandemic has accelerated demand for digital learning and testing. Pearson's doing its utmost to make the most of the shift. That's where the acquisition of Credly comes in. It's hard to fault the logic of the deal, with the new business offering workforces a single ecosystem to track workers' learning. In theory we think Credly shout fit in pretty seamlessly to Pearson's existing business.

Digital sales are potentially highly cash generative and higher margin than physical sales, while digital subscribers are potentially stickier. That would represent a significant improvement to earnings quality if Pearson can deliver the transition - especially in the core education courseware business.

Virtual Schools and VUE Online Proctoring were particular beneficiaries of lockdown rules. We're particularly encouraged to see online revenues driving a larger portion of the whole. The gap is closing. A step in the right direction, but much of the group's revenues are still anchored to physical teaching and testing. Demand for physical textbooks has been on the decline for years and that's made Pearson's pivot to digital protracted and painful.

Even where Pearson has been able to grow sales, profits haven't historically flowed smoothly. Huge investment in Global Online Learning means margins are only being propped up by the increased revenue. Those currently dipping their toes in online education for the first time could swim away when more traditional alternatives become available. That would hurt profits.

Overall the group's poured an enormous amount of cash into securing a new digital-focussed future. Although net debt's drastically improved, providing a stronger foundation from which to propel growth.

That brings us to the new strategy. Focussing on direct-to-consumer business and slimming the group's physical footprint makes sense. All-in, it feels like digital transformation efforts have a new lease of life.

But that's not to say Pearson's report card is a straight-A situation. These ideas have merit, but that's very different to getting the job done on budget and in time. These plans mean yet more money is being poured into plugging the hole in revenues, and it's far too soon to know if the efforts will stem the flow long-term. Shaking up the corporate structure brings significant execution risk.

Essentially there are a lot of ''what ifs''. If Pearson can convince customers to stick with their digital shift as lockdowns ease, then all the pain of the last few years will have been worth it. If not, the group risks becoming a lesson in how not to handle the digital revolution. The price to earnings ratio is a little higher than the ten-year average, reflecting confidence from the market.

Pearson key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full year trading details

Pearson now expects full year underlying profit of around £385m. That's a 33% improvement and ahead of expectations.

Trading in the fourth quarter saw sales growth in every segment, apart from Higher Education.

In Assessment & Qualifications - the group's largest division - sales rose 18%, largely because of a good performance from Professional Qualifications, which is the VUE business. Covid-19 recovery also meant there was positive trading in Clinical Assessment and US Student Assessment. VUE test volumes rose 30% to 16.8m.

Strong enrolment growth in the previous academic year helped Virtual Learning sales rise 11%, which included a 17% in Virtual Schools. Online Program Management (OPM) grew with good underlying enrolment growth of 7%.

Higher Education courseware sales ended the year down 5%, with improvements in the UK and Canada failing to offset declines in the US. The US managed growth in the fourth quarter, but for the second half as a whole US higher education courseware fell 9%, thanks to lower enrolments, courses per enrolment, and pricing pressure.

Sales in Workforce Skills and English Language Learning rose 6% and 17% respectively.

Pearson+, the group's digital direct to consumer service now has 2.75m registered users. Of these 133,000 are paid subscriptions.

The disposal of Pearson's Brazilian K12 Sistemas business completed on 1st October 2021.

The group said it had net debt under £400m and a ''strong cash performance''.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 31st January 2022