Pearson beats expectations

Education giant Pearson (PSON) banked an adjusted operating profit of £250mn in the first half of 2023, 12 per cent higher than analysts expected and 44 per cent higher than last year. This reflects very well on the group’s transformation plan. Almost £60mn of costs were cut in the period, and management expects to achieve £120mn of savings by Christmas. Margins are rising fast as a result, up four percentage points year on year at 13 per cent. Further improvements are expected. 

The strength of demand for Pearson’s products is worth scrutinising, however. The company’s largest division – Assessment & Qualifications – grew underlying sales by 7 per cent to £796mn in the period, helped by higher IT and healthcare test volumes. The English language business also performed well, increasing underlying revenue by 9 per cent to £140mn. Growth was flattered by last year’s weak comparator, but management also reported market share gains in India.

Other parts of the group have seen demand falter, however. Underlying sales fell by 15 per cent in the Virtual Learning division, which was hampered by a decline in enrolments for the 2022-23 academic year and lower district partnership renewals. Management said performance would be lower in the second half due to the loss of a large partner school. Higher Education also saw sales dip by 2 per cent, due to a decline in US college enrolments and competition from "non-mainstream" publishers. 

Both these divisions still managed to grow their profits on the back cost efficiencies. Meanwhile, the group as a whole is still on track to meet its full-year guidance. (Adjusted operating profit is forecast to grow by 25 per cent to £568mn.) However, we remain a little worried about what the future holds for Higher Education and Virtual Learning. Hold.

Last IC View: Hold, 912p, 3 Mar 2023