Pearson plc (PSON) Earnings Call Transcript & Summary

Hello, and welcome to the Pearson Q3 Trading Update Analyst Call. [Operator Instructions] Just to remind you, this is being recorded. So today, I'm pleased to present John Fallon, CEO; and Sally Johnson, CFO. Please begin.

Thanks, Hugh. Good morning, everybody. Welcome to today's Q3 trading update call. I hope you're all keeping safe and well. As you heard, it's John Fallon here. I'm here at our office in Holborn. And I'm here with -- at a safe social distance with Sally Johnson, our CFO; and joining us remotely is our Chair, Sidney Taurel. As you can see from this morning's update, trends have improved in Q3. We've laid them out by division and by quarter in the statement. As we and the world managed to learn how we manage our way through a global pandemic, and we are trading broadly in line with expectations. Before Sally takes you through the details, 3 quick headlines from me. First, in an extraordinary year, I'm impressed with just how well my 22,500 colleagues around the world are stepping up to help our customers, schools and colleges, universities, employers and our learners. As they work through some very challenging times, whether they work in global online learning, up 32% in Q3 as the world embraces virtual schools and online universities or whether it's colleagues working in International, which is down 26% in Q3 as travel restrictions reduced demand and make it more difficult for international students to take the Pearson Test of English as schools remain closed in some countries. And as we see the economic impact of COVID-19, affecting government and parental budgets in countries such as South Africa and Brazil across both 2 extremes, our colleagues have given it everything. We've not furloughed staff. We've not cut investment. We've moved quickly to support blended and on hybrid learning. We've been there from day 1 every day for our customers, our learners and our communities. They've noticed, they've appreciated it, and we're going to emerge stronger from the pandemic as a result. Second, our competitive performance is strong. For example, our major course adoptions regained in Higher Education Courseware, a sustained winning streak of new contracts in school assessments, strong enrollment growth in virtual schools and online universities. And third, we're starting to see the benefits of all the hard work we've done in recent years to lay the foundation and build the platform by which Pearson emerges as the winner in digital learning by focusing on the 3 things that really matter to learners: outcomes, affordability and the experience. I'll be back to say a little bit more about that in a moment. But first, let's hear from Sally.

Good morning. John has given you the headlines. So I'll walk through revenue performance for each division. Global Online Learning revenue grew strongly at 14%. In Virtual Schools, we saw a 41% increase in enrollments for the 2021 academic year following the strong application growth we shared at the half year. We significantly increased capacity in existing schools as well as bringing online of 3 new schools to meet this surge in demand. In OPM, course enrollments declined 10% due to discontinued programs, but grew 17% if those programs are excluded. We're also starting to see the benefits of operational changes we made earlier this year with improved conversion rates and cost per lead. Global Assessment revenue declined by 19%, an improvement from the 27% decline we shared at the half year. Testing centers continue to operate in a socially distance fashion as they're likely to for some time, but pent-up demand is being met with testing volumes up 8% in Q3. U.S. Student Assessment and Clinical Assessment are in line with expectations as schools have reopened. North American Courseware revenue declined by 14% due to the continuation of trends seen in U.S. Higher Education Courseware in 2019, namely continued unbundling of packages and the ongoing shift from print to digital as well as the COVID-19 impact on enrollments and in Canada. Digital KPIs are promising, with digital registrations, including eBooks, growing 9% and strong inclusive access growth. Our international markets have been more challenging. Whilst Q3 showed an improving picture compared to Q2, the COVID lockdown position in some of our major markets has intensified. Year-to-date, revenue has declined by 24% due to a number of factors. Firstly, we've seen a reduction in PTE volumes, which have been affected by the interruption of Australian immigration as well as test center closures in Australia and India. We've seen pressure on enrollment in the enrollment English franchise business, and there have been purchasing delays and budget constraints in our courseware market. Offsetting this, we've seen market share gains in China. Our more flexible digital PTE offering has proven more suitable for the current environment than the traditional paper-based sittings our competitors offer. We're in a strong financial position with low net debt and strong liquidity. At the end of the 9 months, we had GBP 1.6 billion of immediately available liquidity through committed facilities and cash balances. After 9 months, Pearson is on track to deliver an outturn broadly in line with market expectations. However, because of the pandemic, there is larger-than-usual uncertainty surrounding the fourth quarter, particularly in international. And with that, I'll hand back to John.

Thanks, Sally. In education, as in every other sector, the global pandemic is proving to be a great accelerant. You can see that in the data points we're reporting today, which bear repeating and emphasizing: Global Online Learning revenue up 14% year-to-date, up 32% in Q3; Virtual Schools, 61% growth in new starts; 21% growth in returning enrollments; 41% growth in overall enrollments; 17% in online degree enrollments, excluding discontinued programs; a 13x increase in online proctoring volumes to over 1.35 million. In our international markets, Digital Courseware subscriptions are up 34%; North America Higher Ed Digital Courseware up 9% year-to-date, up 12% in Q3. These are big increases, and I could go on. The future of learning was already digital, but COVID-19 is giving it a great, big shove forward. And whilst you can see other companies who are posting decent growth in any one of these areas, Pearson is the only company that is working across such a wide range of digitally fueled growth opportunities. And we're the only company that is posting such strong and consistent digital growth over so many different areas of learning. And more than that, we're leading the way on the 3 things that, in the digital world, learners care most about. And they are acting more and more like consumers as they do so. First, our absolute focus on achieving better learning outcomes. For example, the work we're doing to improve outcomes, particularly in areas like math and science, is what enables us to expand our Virtual Schools massively, as you just heard, without compromising quality or outcomes. Second, our commitment to affordability, enabled by the fact that we're now a much simpler and much more efficient digital business. I found this on the web. For example, on the base of our Q3 results, we expect the weighted average price per unit of our U.S. college courseware to fall by around 9% this year, to be over 20% lower in real terms than 3 years ago as we shift to a fully digital subscription-based model. This year, we're selling around 30% fewer package and print-only units, higher priced, but which then go on to feed the secondary market; and 9% more digital platform and eText, lower priced but with no secondary value. This year, we expect to sell just over 2 million print units, including packages into our core markets, compared to 7 million just 3 years ago and over 15 million in 2012, the year before I became CEO. As a result, we're just now starting to see the first real signs of secondary recapture. There are at least 10 million Pearson units of secondary consumption each year. And every 1 million unit of recaptured by an eText is worth around $40 million, more if we can recapture on one of our new platform offerings. By offering better value to students and with new, more engaging and more outcomes-enhancing products enabled by the Pearson Learning platform, we're now very well priced and very well placed competitively to go after this market and get this part of Pearson growing again. Third, our ability now to offer a brilliant digital consumer-grade user experience direct to the learner. For example, in Global Online Learning, we're already benefiting this year in terms of cost per lead, conversion rates, lifetime value by the work we've invested and the things we've done to modernize, digitize and personalize enrollment, marketing and recruitment and ongoing learner engagement. We're now launching a reimagined pearson.com as a one-stop gateway for all our businesses, growing capability to go direct to learner. As an example, sales of our own enhanced eText double during this last back to school, and we now sell them direct to learners through pearson.com. Through pearson.com, we're also launching a direct-to-learner vertical, aimed at IT professionals and drawing on all the fantastic resources and assessment and connections and partnerships that we have in technology and pathways that builds on the success of U.K. learners and deploys a powerful and proprietary recommendation engine, so that with one application, a learner can explore multiple programs drawn from a wide range of learning partners. This has the potential. It's early stages, but it has the potential to disrupt and transform the Online Program Management industry as we know it today. These are all examples of our ability to offer highly engaging learning direct to consumers through the Pearson platform, personalized to their specific needs. They combine our 3 driving principles: fantastic user experience, enabling a clear outcome for learners, and offering great value in ways that enable us to grow by engaging directly with learners, enhancing the lifetime value of that learning, both for them, and for Pearson itself. I'm sure that Andy Bird, my successor, will have much more to say about these exciting new opportunities. Driving all this is a simpler, more efficient, modernized Pearson now able to innovate and scale more quickly, bringing the next generation of digital learning products to market whilst remaining focused on efficiencies and operational performance, all underpinned, as you heard from Sally, by a very strong balance sheet. I'd like to thank all of you on this call and all our other friends and colleagues in the investment community for your interest in this very special company. The last few years have been hard for our shareholders and everyone involved. We have stayed true to our purpose to empower people to progress in their lives through learning, which I believe is fundamental to the future well-being of our societies and our communities. I'm confident, all our stakeholders will see the benefit of our hard work and that focus on outcomes, affordability and the experience in the years ahead. The future of learning is digital. It's just taken a big leap forward. And as you can see from these trends, Pearson will play a very, very big part in it. Before we go to questions, I think our Chair, Sidney Taurel would like to say a few words. So I'll hand over to you, Sidney.

Thank you, John. Good morning, everybody. Today marks John's last trading update as Chief Executive, and he will, as you know, be stepping down at the end of this week and remaining with the company as an adviser until the end of the year. I wanted to take this opportunity to thank John, both personally and on behalf of the Board, for his commitment and dedication to Pearson. John has a career spanning 23 loyal years of service for the company, the last 8 of which he has served as Chief Executive. Under his leadership, he has tirelessly and resolutely navigated Pearson through a challenging digital transformation and has successfully laid the foundations for the future growth of the company. He will be missed by us all. Thank you. And now I will hand it over to our host for Q&A.

Thanks, Sidney. Hugh, just before we do, I should just also thank Sidney. I know how committed he is to Pearson. I know how hard he works for the company, and I know he shares my confidence and optimism in the great opportunities that lie ahead. So thanks, Sidney. And Hugh, now back to you.

[Operator Instructions] And our first question is over the line of Nick Dempsey of Barclays.

I've got 2 questions. So first of all when looking at progress in North American Courseware, there's still a pretty strong structural drag in Q3 between an enrollment decline, which we don't exactly know yet, and the revenue growth you delivered. These things don't change fast. Should we still be expecting a decent structural drag in 2021 to offset what might be a small bounce back in enrollment in 2021? Or how should we think about that, given all of the moving parts you've talked about today? My second question, in 2019, I think it was clear at this point that you were going to, and then you did, make a string of Q4 savings that you described as unsustainable to hit the operating profit number. Are you putting those costs back in during Q4 2020? And if not, will you have to put them back in, in Q4 2021?

Okay. Thanks, Nick. Sally, why don't you take the second of those questions, and then I'll perhaps pick up on the outlook for higher ed in the years ahead?

Sure. So if we look across this year, obviously given the situation that we've been in from a macro point of view, I think I've talked about that, that we've been making GBP 10 million worth approximately of savings each month to offset the revenue decline. Obviously, we've got the transformation savings this year coming through of GBP 60 million well, and then the GBP 50 million worth of cost savings going into next year. So I'm not sure it's really relevant to be talking about Q4 this year compared to Q4 last year. We're still making those ongoing savings off that revenue.

Okay. Thanks, Sally. And then on your first question, Nick, I think the -- clearly we'll see what happens with enrollments. I mean on the basis of the National Student Clearinghouse data that we've seen so far, it looks to us as if we're looking at probably an enrollment decline this year of around 5%. From what we're hearing from channel partners and from universities, I think it may be a little worse than that. But I think assuming a 5% decline in enrollment this year when normally we'd be looking at a 1% to 2% decline in that potentially turning at some point, so I think that's how I think about enrollments. We've clearly got an improving competitive position. You can see that in the comments I made about -- we've regained some of the adoption, the 1% or so of adoption use that we lost. Not we've got all of it back yet, but well on the track to doing that. We've got all the disruption behind us. We've got the cost base and the sales force in the shape that we want. They were -- we had a fantastic back to school. They were back in the field very quickly. So we've got real momentum there. And obviously that momentum is helped significantly by the new products and services that we've got coming on the Pearson Learning Platform. OER and nonconsumption remains a factor, and it will do, but we are competing well there. And so we feel confident that there's nothing changed from what we've told you previously. So I think it all comes down to when does the work that we're doing to deliberately accelerate the shift from bundled packages and print-only get offset by our recapture from secondary. And I think the reality is we had what -- I mean, well, I just -- I mentioned, just over 2 million units of combined package and print. So there's still a little way to go, but we're clearly now significantly closer to the tipping point than we were a year ago when we were at 3.5 million, or 3 years ago when we were at 7 million. So whether that happens or '21 or '22, I don't think any of us can call. But clearly we're getting to a point where the structural challenges start to work in our favor because of the work we've done to really focus on getting the weighted average price of our product down, so that we can compete very effectively with secondary, and we shift everybody to digital products for which there is no secondary market. So I think that's broadly how I would think about it. Okay. Thanks, Nick.

Our next question is over the line of Katherine Tait at Goldman Sachs.

A few questions from me. And firstly, on the Virtual Schools, obviously it's been a phenomenal year for enrollment and registrations. Just wondering what your sort of outlook in -- is in terms of how sustainable that absolute level is going forward. Or would you expect to sort of see that come down into next year in the occasion of obviously trends normalizing or sort of the broader ability to attend school physically normalizing? And that's my first question. Second question, you very helpfully gave some commentary around average weight -- average weighted price per unit in U.S. higher ed. Can you give us an absolute dollar number for that? And also just help us understand how that compares to, I think, the $80 average price you gave us before for Digital Courseware previously. And just yes, help us understand the sort of dynamics there. And then finally just on Q4, are you expecting U.S. Higher ed to trend in a similar way to Q3? Or do we continue to get that shift out to Q1 from the sort of higher proportion of digital? How should we think about those sort of print and digital trends for Q4 in U.S. higher ed?

Thanks, Katherine. Sally, do you want to take the first and third of those Virtual Schools and the Q4-to-Q1 shift? And then I'll deal with the question around the weighted average price.

Yes. So in terms of Q4 for U.S. higher ed, Q4, just because of the way the school year-end lands with spring back to school tends to be more of a print quarter. So we're expecting to see the trends that we've seen previously, which is from a net revenue point of view, the same trend as you see in the 9 months with gross sales being down more than that, but offset by increased deferred revenue coming out of the 9 months from the digital trends that we've seen. And then in terms of Virtual Schools, you're right, a brilliant performance and that strong enrollment performance for the 2021 school year. So for the last half of this year and into the first half of next year. I think it's fair to say that if you look out to the long-term opportunity for Virtual Schools, it was already a strongly growing business. I think what's happened with COVID has helped recognition of online schooling with parents in particular. And therefore the situation we found ourselves in will be net positive as you look out into the medium term. But for sure, when we come to the '21, '22 school year, there is bound to be an element of a COVID cohort in there in terms of next year.

Okay. Thanks, Sally. And then on your second point, Katherine. So the price points, the foundation of our digital-first strategy are sticking. So around $40 for an eText, around $60 for print rental, and sort of $75 to $80 for a platform product, depends on the precise mix between Revel and MyLab and Mastering because they're slightly different price points, but broadly speaking that's it. So the good news is those prices are holding. So the reason the weighted average price is coming down is we are essentially selling significantly fewer bundles which would cost around $120. And we are -- and they are shifting from bundles to the $80 platform price. And we are shifting $80 print textbook purchases to $40 eText. So the faster we do that, the more obviously we hurt our revenues short term, but clearly we are now essentially starving the secondary market of supply. And we are -- the units, the volumes that we're losing on those higher-priced products have been more than made up by actually higher volumes on lower price. So you can see that over time, that's the process by which you recapture the secondary market. When I said we saw a little bit of benefit, I mean by the fact that the -- in a units point of view, we're now selling more units of the lower-priced products than we're losing units of the higher-priced products. So that's the first early indicator of secondary recapture. We'll obviously only see the economic and financial benefit, as I say, when we reach that tipping point. That should be some time in the next couple of years, but precisely when depends on how quickly that other 2 million we flush out of the system. But it's a very encouraging story and shows you why this business should soon start to grow again.

Our next question is over to the line of Sami Kassab of Exane BNP Paribas.

A few questions, please. At the interims, you had disclosed that application growth for Virtual Schools was 61%. You now reported 41% enrollment growth. Can you please explain the difference? Is that capacity constraint that didn't enable you to absorb all the applications?

Yes, Sami, very -- Sami, I think if you heard me, I said that we have a 61% growth in new enrollments. And then you've got a 21% growth in continuing students. So that's what leads you to the 40% number. But that 60% growth in new applications did lead to a 60% growth in new enrollment. So it did come through.

Very good. Secondly, can you disclose and comment on the underlying revenue performance of the Advanced Placement courseware business within Higher Ed Courseware? How is it performing? It's more of a print product. Historically, it was stable. We had fewer AP exams this year. So any discussion around that, please, would be helpful. And lastly, can you remind me please of the strategic interest of owning School Courseware assets across the world? You've sold the U.S., you've sold Japan, you sold Singapore. Why keep Italy and Canada and South Africa, they are still [ holding ]. South Africa is -- can you discuss the idea of having all those School Courseware outside of the U.S., please, John?

Well, I'll probably check both of those. Sally, chip in on the AP. I think I'm right on Advanced Placement to say that it's down a little bit this year because of the fact that for the reasons that you implied because obviously the K-12 publisher business has been very badly hit, as you've probably seen from the results of other companies. But actually AP held up relatively well. And it held up well partly because we have a very strong digital offering in AP because you've got MyLab, Mastering, Revel courses. So I think it was down more than the overall performance of the Higher Ed Courseware business, but held up relatively well in the circumstances. And on School Courseware, I think we've been pretty pragmatic about these businesses around the world. If you look at places like Italy, South Africa, Hong Kong, Australia, these are good, strong, profitable businesses. They consume relatively little capital or investment, and they are a good source of profit and cash. But as we've shown, for example, with the disposal of the K-12 publishing business in the U.S., we take a pretty pragmatic, hard-headed view of it. And if we think there's a better owner than us, then I'm sure that that's something Sally and my successor will keep a very close eye on. Okay? Thanks, Sami.

Okay, we now go to the line of Adam Berlin at UBS.

Just a couple for me. Firstly, I just want to clarify your comments in the 2020 outlook where you're saying that your -- you think consensus is broadly in the right place. Is that -- are those numbers any different from what you said at H1? Are you -- because obviously the exchange rates have moved. So are you saying anything different to what you were saying at the end of H1? And if so, where has performance been weaker than you expected? So that's the first question. The second question is around the adoption share gains you mentioned, John. Are those just the kind of up and downs you get with trading and some days you win, some days you lose? Or is that the more structural trends emerging from a superior set of Digital Courseware products that your competitors don't have, and therefore we should expect you to continue to gain adoption share growth through the medium term? That's the second question. And then...

Thanks, Adam. Sorry, go.

Just one more, sorry. It -- is there any risk that when school college bookstores are open in Q4, there's lots of books sitting on shelves, and you get a big set of returns that you're not expecting of print books in Q4 because there's lots of them have been closed this year?

Okay. Sally why don't you pick up on questions 1 and 3, and then I'll deal with the second question?

Yes, of course. So on the 2020 outlook, no, it's exactly as we said at H1. We're in line with delivering the consensus that we recorded on Vuma at that time you'll remember. From an FX point of view, obviously FX moves throughout the year. But if you take our results and you look at them in local currency, you translate them, FX just moves in line with that. At the point in the half year, the U.S. dollar FX rate was $1.25. The average rate September year-to-date is $1.26. It remains to be seen what happens with the dollar rate over the next quarter, but you'd expect it to be around about that range. And now, it's $1.3 this morning, maybe it trends a little bit higher than that. But what we're saying about the underlying business is exactly the same as we said at the half year, recognizing that there is some uncertainty in Q4 compared to what -- where we'd normally be.

Okay.

And the last question about college bookstores, yes, they're closed but they have staff in the shops. And we are in close contact with them about the level of stock that they have. And therefore, we are on top of the return profile as we enter into Q4.

And I think it's also a fact that we've seen yet another big analog-to-digital shift. It just means they sat with a lot more stock. They took a lot more stock in the first place, which should also give us greater reassurance. Adam, on your second point, let's -- I've seen quite a lot written around the market share and the like. So let's deal with this a bit more broadly. So there's 2 ways to think about our share in the Higher Ed Courseware business. The first in the way that you've just described it, which is adoption share. So of all the courses taken in universities and colleges across the country, across America that could use Pearson Courseware, how many actually do? And our share -- our adoption share has traditionally been around about 35%. As we've discussed previously, we lost about 1 point or so of share in 2019 because of the supply chain challenges we've had as we completely remade the cost base compounded by the fact that we have our sales force as we moved to a digital-first strategy. As I signaled, we have gained back most, if not all of that share. And I think that is a result of what you've said. It's just we're backed on our game. The team are focused. We're organized. We're going after it. And as I say, I think we should gain back more of the rest of that point or so over the next 6 to 12 months. Beyond that as we launch the new products on the Pearson Learning Platform, as I've signaled I think they give us a real competitive advantage, both from a pricing point of view and in terms of features and functionality, which I think our competitors will struggle to match. And so I will leave Andy and Sally to make predictions about what that mean. But certainly, it puts us in a very strong competitive position from an adoption point of view. The second way to think about share from a revenue perspective. And that's what this MPI data measures, which is it looks at the collective sales of the major 6 publishers in the industry. And traditionally, our 35% share of use has translated into 40% share of revenue. And that's because we are overweight in our share of use in the STEM subject, science technology, engineering and math. Those are subjects where the textbooks cost more and people are more likely to use a package product, Mylab or Mastering, bundled with a textbook. As we do what I've described earlier, as we move to a digital-first strategy to go after the secondary market, we are cannibalizing those sales more quickly. And because we have a higher share than the industry as a whole, that has a bigger impact short term on our revenues, okay? But the way I look at it is frankly, if it expands the market, makes the addressable market bigger, clearly a 35% share of a $4 billion market is better than a 40% share of a $3 billion market. So it's the right thing to do for the long-term even if it hurts our MPI share short term. However, once we get through the other side of that onetime impact of the cannibalization, because we do have a higher share in STEM and because those are students that are more dependent on platform products, we should then get a bigger benefit than the rest of the industry, helped also by the fact that we should also see gains in terms of adoption use. So I've answered the question a bit more broadly than you asked it, Adam. But I think there's been some confusion about share of adoption and share of revenue. And the second is directly affected by the digital-first strategy, which hurts our revenue short term, but expands our addressable market and makes a better business over the longer term. So I hope that's clear, and I hope that clarifies the position. Okay. Thanks, Adam.

We now go to the line of Tom Singlehurst at Citi.

Firstly, just I say thank you, John, for all the hard work and all the best for what comes next. It's fair to say it's been a bit of a rocky ride, but you've always been very cheerful in being willing to share your views and perspectives in a very open way. So that's very much appreciated. But I had a couple of questions as well as saying congrats. The first one was on that data point you gave about $40 million of revenue per 1 million units of recapture in the secondary market. I was just wondering whether we should think about that as a sort of gross revenue opportunity? And are you sort of saying there's a $400 million revenue opportunity in your mind longer term from that sort of recapture process? That was the first question. Second one was on school assessment. I mean obviously that's slightly dragging on what was otherwise a very decent rebound in the sort of review testing business. I'm just wondering what the risk is around exams being canceled or delayed for next year as well might be. And how we should think about that relative to the school assessment wins that you talked about? And then very finally, just wondering whether you could talk a little bit about the nature of the uncertainty on the outlook for International. I think the market tends to get a bit scared when you use the word broadly with respect to the outlook and guidance, but can you -- I mean what are the major sort of puts and takes in terms of things that we should look out for in International, in particular, for the 4Q that could go wrong?

I say -- thanks, Tom, and thank you for your kind words. Let me deal with 1 and 2, and then Sally will pick up on the third. And I'm sort of smiling wryly because clearly as an outgoing CEO, I could make all sorts of reckless commitments on behalf of my successors, that I will not make. The point I was just making is that clearly, there's a significant opportunity to expand the addressable market. And I was simply doing a bit of math, which is if we can sustain a $40 eText price, then if you regain 1 million units that are currently going to rental of a secondhand textbook and you can translate that into the download and subscription of an eText, then that is worth -- that would be worth $40 million. But I mean, and to be clear, we think there are 10 million units of Pearson product each year that are consumed in the secondary market. So it -- that's the math. But to repeat what I've said earlier, we still got just over 2 million units going into the secondary market. So there's still a little while yet before you will start to see that turn. But clearly when it does, there's a significant opportunity. And when we get to that point, I'm sure Andy and Sally will share with you how we're thinking about it at that time. So I hope that's clear on the first point. On the second point around school assessment, yes, that's a risk. But I think 2 data points. One, the federal government in the U.S. just makes it clear that the waiver around high-stakes test for accountability purposes was a 1-year waiver. And everything that we've seen of the education platform of the -- if we had a Biden administration or a Trump administration, the Biden administration is clearly very focused on accountability standards and all the evidence tells us that the best way to ensure educational progress, particularly for minority communities, is to have a proper system of accountability. So I think we'll continue to see the shift to fewer, better, smarter assessments. But I think they will want to do everything they can to ensure that assessments do happen in the U.S. next year. And you all saw the nightly news through August as I did. I think the lesson in the U.K. around GCSEs and A levels, what that tells us is if exams don't get -- take place, you have a real problem that is very unfair to somebody. So I think we can be pretty sure that every possible effort is going to be made to ensure that exams take place in some form or another next year. As you've heard, they're going to be 3 weeks later. We're slimming down the curriculum. We're also working closely, and we'll have a very major role to play in working with schools and colleges to moderate the sort of more rigorous mock exam. So it makes -- no one can say precisely how it will turn out, but whatever system there is for assessing and progressing students next year in the U.K., I think you can be pretty sure we're going to have meaningful work to do for which we will get paid. Sally, do you want to pick up on the outlook for the balance of the year, particularly around International?

Sure. And I think it's sensible to be cautious given the times that we are living in. About 1/3 of the International division's profits come in Q4. To give you some flavor, the particular parts of the world that, that relates to would be South African courseware and Asia. And I guess what's different this year to other years is we have line of sight to the orders that we're expecting in Q4. And whilst that would give me certainty in usual times, given commitments from governments for example, I think people are making real-time decisions, and it's always possible that education budgets are transferred to health care in the short term. And I need to recognize that uncertainty.

Okay. Thanks, Sally. Thanks, John.

We're going to Matt Walker of Crédit Suisse.

John, can you hear me?

Yes.

The first question is go back to your secondary recapture opportunity, which was about 10 million Pearson units. And it was the sort of $400 million that Tom threw out there. That's only about 13% of a roughly $3 billion secondary market. So maybe you could explain that in terms of the value of likely recapture over the long term. The second question is on the enabling costs. And I was just wondering if you could give us a feel or Sally could give us a feel for how those would be in absolute terms for 2020 compared to the roughly $450 million that you did in 2019. And then just on enrollment for next year, obviously none of us really know what's going to happen. But community colleges are down quite heavily this year, even though unemployment has spiked a lot. Given that and given pathways and the lack of jobs that people find themselves to go to college with, is there a risk that basically the high unemployment doesn't see the same correlation as we saw in terms of going back to college as we saw in 2010?

Okay. Sally, do you want to pick up on the second question? And I'll deal with 1 and 3.

Yes, sure. So in terms of enabling costs, I think the way to look at it is the GBP 60 million worth of savings that we're making this year as the last part of that -- of the 3-year transformation program. A large proportion of those would be in Enabling Functions. And then looking through to next year, a fairly sizable proportion of the GBP 50 million of savings next year would also relate to Enabling Functions.

Okay. thanks, Sally. I mean on your first point, Matt, you could be right. I think that the number of secondary units in the secondary market could be much bigger than 10 million, but I don't know about you, a $400 million opportunity seems plenty big enough to me to be getting on with for now. And we'll sort of worry about the fact that it may be bigger at a later date. I think the opportunity is -- the clear point is there's a very significant opportunity there. And on your third point on the -- around college enrollments, I think it's quite -- I would contrast what we've seen because I think your cross-reference to the pathways is an interesting one. What we saw in Virtual Schools, parents moving really quickly. So we very click -- quickly saw a big increase in applications to Virtual Schools. Those parents are also the same people who would be looking about potentially enrolling in community college or going and doing a sort of undergraduate degree at Arizona State University or Maryville or at [indiscernible]. And what was interesting is it took longer for that growth in enrollment and interest in the higher education sector took longer to come through. I think you can think about that. If you're a parent, your immediate priority is to sort my child out. And then I'll worry about myself at a slightly later date. So I think that's what's happening. And I think we might see -- we'll see, but I think we might see community college enrollments go much deeper into the end of the year, this year and into next year. So I think you'll -- I think it's just natural behavior by middle class parents, which is sort the kids out first, get greater clarity about my own employment status. "Have I got a job? Am I furloughed? Am I being taken back on?" And so it will take a bit longer to feed through. So I think you'll see it, but I think it will take longer to come through. Okay, hope that helps.

We have the final question -- well, we only got time for one more question and that's over to the line of Patrick Wellington at Morgan Stanley.

I hope you hear me. 3 questions. You talked about selling [indiscernible] million print, it's 2 million...

We're struggling to hear you, Patrick. We do.

Sorry. 2 million units in education in this year, how many of those still to be sold in the fourth quarter? My second question is can you talk a bit about 2021 or the potential implications [indiscernible] to in Australia roll forward into '20? What is your [indiscernible] of that? And are the [indiscernible] do you think [indiscernible] business? Are we just talking about difference of courseware sales in places like South Africa [indiscernible] there [indiscernible]

Patrick, I'm sorry. Patrick, we're really struggling to hear you. I got the first of those 3.

I think the first was how many of the 2 million would come in Q4? Around about 20%.

Yes. And I think we've got a good data by projecting forward. And that's why I gave you -- I said it will be around about 2 million. Obviously, in Q4, [indiscernible] get sort of forward orders from bookstores ahead of January, but you also get significant returns. I was giving you the net number. I think we feel pretty confident that, that it will be -- that's why I said it will be around 2 million or a bit more than 2 million. It will be that sort of [indiscernible] level. Can you try your second question one more time, and we'll see if we can hear it?

I'll try the second one, which is the impact into 2021 of [indiscernible] business? i.e., are courseware an issue of deferrals? Or is it smaller [indiscernible]? What do you expect to have to the Pearson Test of English business if for instance Australia isn't having a big immigration program into next year? i.e., what are the potential '21 effects of some of the things that have gone on there?

So I think just to capture, I think the question is to what extent is the deferred in test taken in the Pearson VUE and Pearson Test of English business, just so are they sort of lost forever? Or will they come back in '21? I think that's the -- does that sound like the question?

I think that's [indiscernible]

That's it.

I'll [ take ] the question. We'll answer anyway. So, Sally, do you want to take that?

Yes. So VUE as I said, registrations in Q3 up strongly. That's starting to move through that pent-up demand we're saying what happened in Q4. As we exit the year, I'm anticipating that VUE will then be back in a sort of pre-COVID revenue track. They will be down for 2020 from a revenue perspective. Those revenues will be revenues that will be gone. The examples of why in that if you were going to take a GED test in 2020, you probably aren't going to take it in 2021. If you're going to take it in 2021, you still will. And there were some of our partners who decided to waive testing temporarily for things like GMATs if you're going then to take an MBA.

Okay. And Patrick, do you want to have one last go at your third question? We'll see if we can pick it up.

John, I'm going to abandon the third question. I'm going to say thank you very much for all you've done over the years. You're a thoroughly decent guy. You're very sincere. You've never shied of -- from taking away hard questions from Ian Whittaker, from me and anybody else, so well done for that. And thanks for everything.

[indiscernible]

Thank you, Patrick. And I appreciate it and appreciate your ongoing interest in the company. And as I said, the thing I'm most envious of Andy of is that he's going to discover for the first time what a very special company this is. And it's also made special by the passion and commitment of all the people who follow it. And I think you've stuck with us because you recognize what we do is important and that there's a great opportunity here if we can just unlock it. And that's what I'm very confident the team is going to do. So thanks, Patrick. Thanks to all of you and good look for the future. Thanks now. Goodbye.

This now concludes today's call. Thank you all very much for attending, and you can now disconnect your lines.