18th Jan 2017 09:01
LONDON (Alliance News) - Shares in Pearson PLC lost a quarter of their value early Wednesday, after the education publisher it withdrew its ambitious operating profit target for 2018 and warned on its outlook for 2017, following a slump in its North American higher-education courseware business in the final months of 2016.
Pearson was down 26% to 595.92 pence, easily the worst performer in the FTSE 100.
In January last year, Pearson set out a plan to hit an operating profit target of GBP800.0 million by 2018. The target, reliant on swingeing cost cuts and a substantial restructuring in its core education business, had been considered too ambitious by some analysts, given the structural issues which face Pearson's education arm.
Those structural issues were laid bare on Wednesday when the group said the fourth quarter of 2016 had seen an "unprecedented decline" in its North American higher education courseware business, which includes printed text books.
This division, Pearson said, was "much weaker than expected" in the fourth quarter. Net revenue fell 30% year-on-year, and revenue for the business for the full year was down 18%. Pearson estimated about 2.0% of this decline was due to lower enrolment, particularly in community colleges, with about 3% to 4% of the decline from the impact of students renting books rather than purchasing.
Another 12% of the decline was due to an "inventory correction" in the channel, reflecting the cumulative impact of the two previously noted issues over recent years, Pearson said.
Beyond North American higher education courseware, Pearson said its other divisions were in line with its expectations in 2016, with a stabilisation in its UK qualifications arm and better profit from its North American student assessment business.
Pearson said its operating profit for 2016 will meet its guidance, despite an "unprecedented decline" in its North American higher education courseware business in the fourth quarter of the year. This will be offset by the restructuring Pearson undertook last year, the cost savings from which will be a little ahead of plan, it said.
In particular, Pearson said it has been tightly managing discretionary costs and said it will pay out around GBP55.0 million less than originally planned under its staff incentive scheme, helping keep operating profit within the guidance range.
But the pressures on the North American higher education courseware business have forced the group to rebase its expectations for 2017, on the assumption these woes will not abate. Pearson said it will accelerate is shift to a digital business model in the division, investing another GBP50.0 million in doing so, and will increase its participation in the courseware rental market.
In the latter channel, Pearson will cut eBook rental prices by up to half for 2,000 titles in a push to make its books the best option for hard-pressed students. It will also launch its own print rental programme, ensuring it gets paid more often for the use of its textbooks.
In addition, Pearson said it will continue to reshape its overall portfolio and will serve notice to German partner Bertelsmann AG that Pearson will sell its 47% stake in the Penguin Random House book publishing joint venture. The proceeds from this will be used to boost Pearson's balance sheet and to make further investment in its core education business.
Pearson also said it will reduce its exposure to "large scale direct delivery services" and shift its focus more keenly to "more scalable online, virtual and blended services" in its education business.
Pearson will enter 2017 with an underlying operating profit base about GBP180.0 million lower than it had expected in early 2016, and this means the group also has trimmed its underlying operating profit guidance for the 2017 to GBP570.0 million to GBP630.0 million
Pearson will rebase its dividend payout in 2017 due to the problems faced in the business, though it committed to paying out a 34.00p final dividend for 52.00 pence in total for 2016, in line with previous guidance.
In addition, Pearson has withdrawn its guidance for underlying operating profit of GBP800.0 million or more for 2018.
The company will publish annual results on February 24.
By Sam Unsted; [email protected]; @SamUAtAlliance
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