Edtech still awaiting growth spurt

Every so often, a piece of technology emerges with the power to transform the school system – or so it seems for the first couple of weeks of term. By the end of the year, the magical kit will probably be gathering dust in the corner of the classroom next to the lost property. Interactive whiteboards are a prime example of this. Ushered in with great reverence about 15 years ago, they have since been used as very expensive chalkboards, which – unlike their dusty predecessors – occasionally crash and erase all the teacher’s writing.

The rise of technology in schools has been predicted for more than a decade. In 2011, the Financial Times declared that schools must embrace “digital revolution”. A similar article appeared two years later, arguing that “changes in schools, colleges and universities are likely to prove as disruptive as those in media and finance”. But the pandemic largely showed the extreme difficulty in keeping students engaged through a screen, and exposed how inequality can grow when pupils have to rely on expensive technology (and the internet).

And yet, in May this year, analysts at Peel Hunt continued to describe edtech as an “undeveloped market”. Meanwhile, research from Citigroup revealed that spending on technology represented barely 3 per cent of the overall education market in 2019, with analysts concluding that the sector is "a significant laggard”. 

Difficult industry 

Covid-19 threw digital learning into the spotlight once again – and, to be clear, underlined its potential. In June, the Department for Education said demand for edtech in the UK had been “accelerated by the pandemic”, with the sector growing by 72 per cent in 2020 and worth an estimated £3.4bn at the end of 2021.

However, corporate success stories remain few and far between – particularly in the UK. RM (RM.) began life in Oxford in 1973 as a “pioneer of education technology”, but growth has languished in recent years. Its technology arm – which helps schools devise IT strategies – has proved particularly disappointing, with sales growth failing to get going despite a series of optimistic predictions. 

Counterintuitively, the pandemic only seems to have made things worse. RM’s technology profits in 2021 were almost a third lower than in 2019, and digital assessments profits are also falling, with management blaming higher costs relating to software development. The group is now in the midst of a tech turnaround plan, and has appointed new faces to head up the division. 

It’s possible that RM – trading at a sixth of its pre-Covid share price – is simply a victim of poor strategy. However, other companies have encountered similar challenges. Pearson (PSON), often associated with weighty textbooks and GCSE exam papers, has been trying to go virtual for years, selling off publications like the FT and its half share of The Economist, as well as its stake in Penguin Random House. It is now firmly focused on digital materials for schools and universities and workplaces, although this last category is far smaller. 

Pearson’s digital transition has been a painful one, peppered with profit warnings and management reshuffles, but things have started to look up this year. Its assessment arm is growing again after a bad lockdown; demand for its English language courses is strong; and its modest workforce skills division shows promise. 

However, the growth of Pearson’s specific ‘virtual learning’ business has been far from explosive. Demand for the group’s online schools shot up during the first lockdown, but sales growth flattened in 2021. Meanwhile, revenue from ‘online programme management’ – which delivers digital post-graduate courses – has seen revenue fall after a drop in enrolments, and Pearson has recently lost a contract that represents about a third of the unit’s sales.

Fears about enrolment numbers also dog Pearson’s higher education arm, which provides digital resources for American college students and fell into a loss in the first half of 2022. While US student numbers tend to grow during difficult economic periods, as workers try to upskill themselves, analysts have flagged concerns about the growing cost of education, and a rising perception that the value of a college degree isn't as valuable as once thought. 

Fairness fears

It is clear, therefore, that profiting from edtech in the long term is not as easy as it seemed in the lonely days of Covid. This is not just the case for UK companies: after a flurry of lockdown flotations, several US edtech groups are also having a rocky time. 

Shares in Coursera (US:COUR) – a free online course provider – have lost 70 per cent of their value since last August, hit hard by the US tech sell-off. Shares in rival Udemy (US:UDMY) have followed a similar trajectory, while Chegg (US:CHGG), which listed in 2013, has seen its share price fall by 76 per cent in the past year.  

It’s not simply about reduced demand – competition is also heating up. Analysts at Berenberg warned that conditions for Pearson would "remain exceptionally difficult in the US higher education courseware business” due to competitors introducing new, lower-cost business models that deliver cheap, quality materials. They also warned of growing regulatory pressures from the Democrats.

There is also the issue of fairness. Last year, the value of Chinese education companies plunged after Beijing tried to ban them from making a profit from tutoring core subjects. The move was partly driven by a desire to level the playing field between rich and poor children. 

The UK is unlikely to see anything as extreme, but - all over the world - edtech treads a fine line between reducing social inequality and increasing it. Online exams are a good example of this. In its half-year results, RM predicted that all assessments would eventually go digital. However, chief executive Neil Martin admitted that a number of equality issues would have to be tackled beforehand.

“I think we are quite a long way from school exams being fully online,” he said. “In part, because you have to make sure you don’t enable a digital divide between the ‘haves’ and the ‘have nots’. There is clearly a big difference between how different schools use technology.” 

In the near term, he said, focus would remain on professional awarding bodies and vocational assessments.

Workplace opportunities

This last point hints at a lucrative world beyond schools and universities. While RM and Pearson toil with traditional learning environments, several UK companies are navigating the world of workplace training with greater success. Learning Technologies Group (LTG) - which combines digital workplace learning and talent management services – is one of them.

While shares crashed earlier this year after the group delayed its results, its performance has proved robust, with growth stepping up a gear since the pandemic struck. Revenue is expected to more than double in 2022 after the acquisition of GP Strategies, a provider of sales and technical training, among other things. 

Wilmington (WIL) also looks promising. The governance, risk and compliance specialist has cleverly monetised large amounts of data by offering information and training services. Both divisions reported strong profit growth this year, and the group is investing more in digital training. This is paying off: management noted in February that it had maintained a “much higher proportion of digital training delivery volumes compared to the pre-pandemic period" resulting in notably higher margins.

Working from home – unlike home-schooling – shows no sign of warning, and the tight labour market means employers are increasingly trying to fill gaps in their workforce by retraining existing staff. There’s also the helpful fact that private organisations tend to have bigger budgets than schools, most of which are reliant on government funding. 

"As a sub-segment, investors are definitely more captivated by the life-long learning market than by traditional education," said Sarah Simon, a senior media analyst at Berenberg.

As children return from their summer holidays, therefore, it’s worth remembering that many parents will be heading off to lessons as well.