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Pearson - solid first quarter

First quarter underlying sales rose 7%, driven by double digit growth in Assessment & Qualifications and English Language Learning...

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First quarter underlying sales rose 7%, driven by double digit growth in Assessment & Qualifications and English Language Learning. There was also positive momentum from Workforce Skills and Virtual Learning. Higher Education continued to decline, with sales down 5%. Businesses facing possible disposal fell 11%, as expected.

Pearson bought Mondly - an online language learning platform in the period.

The group's on track to meet its full year expectations, and has completed the first tranche of its £350m buyback programme.

The shares rose 2.5% following the announcement.

View the latest Pearson share price and how to deal

Our view

Education specialist Pearson's shift towards digital is happening faster and more smoothly than we'd feared.

That's being achieved by some well-suited acquisitions, as well as organic growth through its own efforts. These include, focussing on direct-to-consumer business and slimming the group's physical footprint.

Digital sales are potentially highly cash generative and higher margin than physical sales, while digital subscribers are potentially stickier. We said that this would represent a significant improvement to earnings quality if Pearson can deliver the transition - especially in the core education courseware business. And we are starting to see digital make up a bigger part of the whole - largely thanks to accelerated demand for virtual learning and exams brought on by the pandemic.

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 means margins are set to stagnate in the short term. We're also aware that 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.

Essentially there are a lot of "what ifs". If Pearson can convince customers to stick with their digital shift, 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 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 results (25 February 2022)

Full year underlying sales rose 8% to £3.4bn, helped by strong growth in Professional Certification. Underlying operating profit rose a third to £385m, thanks to higher sales and costs savings.

Pearson outlined a strategy update, which includes growing its presence in work-based learning, citing employers as key education customers. The group's also acquiring Clutch Prep, a video-based learning company that will be used with Pearson+.

From 2022 - 2025, Pearson expects revenue to grow by mid-single-digits and margins to remain flat, improving by 2025 to mid-teens.

A final dividend of 14.2p was announced, and a £350m buyback will start in 2022.

Assessment & Qualifications revenue rose 18% to £1.2bn, largely reflecting strong demand for professional qualifications through the VUE brand. Pearson VUE revenue rose 19% overall, marking increased volumes thanks to COVID recovery. Divisional operating profit rose 59% to £216m.

Increased school enrolments helped Virtual Learning revenue rise 11% to £713m - there was 43% growth in Virtual Schools across new and existing schools in the last academic year. Operating profit rose 28% to £32m.

English Language Learning and Workforce Skills saw revenue rise 17% and 6% respectively and operating profit rose from £1m to £15m, and rose 8% to £27m.

As expected, Higher Education sales continued to decline, falling 5% to £849m, while operating profits fell 15% to £73m. Declines were led by US Higher Education Courseware, which offset growth elsewhere.

Sales In the international courseware local publishing businesses, which are under strategic review, rose 1%.

Pearson has made considerable progress on its direct-to-consumer strategy, including reaching 2.75m registered users for Pearson+.

Despite higher profit, free cash flow fell to £133m from £229m, largely relating to tax changes. Net debt fell £350m and is now equivalent to 0.6 times cash profits.

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: 29th April 2022