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Pearson disappoints at three-quarter mark

The group warned that profits would be at the bottom-end of its guidance
September 27, 2019

Shares in Pearson (PSON) plummeted by more than 15 per cent after it revealed that full-year adjusted operating profits would land at the bottom of its guided £590-640m range. 

IC TIP: Hold at 739p

In a nine-month trading update, the media group pointed to weaker-than-expected trading in its US higher education courseware business, over its main selling season. During the period in question, this division - which constitutes a quarter of total revenues - contracted by around 10 per cent. For 2019 as a whole, Pearson now anticipates a revenue decline of 8-12 per cent – worse than its earlier guidance of a 0-5 per cent decline.

“Whilst difficult in the short term this places more importance on our work to remake this part of Pearson”, said chief executive John Fallon. He added that “we are exploring new ways of deploying our new technology platform so that we can offer students highly affordable, convenient, adaptive, digital courseware”. 

Pearson still expects its top line to “stabilise” this year – citing good growth in other areas. Indeed, its ‘core’ and ‘growth’ segments saw underlying improvements of 5 per cent and 3 per cent respectively as at September, against North America’s fall of 3 per cent. But the group did not reiterate the projection of a “return to top line growth in 2020” uttered as recently as July’s half-year results, within which all three businesses reported single-digit improvements.

In somewhat better news, Pearson said that its financial position is steady, and net debt should be in keeping with 2018. It is still on schedule to see more than £330m of annualised cost savings – with the benefits coming through from the end of 2019.

That said, Liberum – which rates Pearson as a ‘sell’ – reckons that “management have cut costs to the bone and there is simply no more to go for without significantly damaging the model further”. Analysts here also point to the erosion of faith in management’s ability to give guidance.