Pearson plc (PSON) Earnings Call Transcript & Summary

Thanks, Andy, and welcome to the Q&A part of the presentation. [Operator Instructions]

And with that, let's kick off with the first question. It comes from Tom Singlehurst from Citigroup. Andy, there's 2 for you and then I'll come back and one for Andy and one for Sally. First question, in the past, you have highlighted issues with an all-you-can-eat approach with respect to safeguarding authors' interest. Can you outline how your model resolves these issues? And secondly, can you give some additional color on premium functionality in the Pearson+ app? What study tools work with the app from the get-go? And what pricing premium are you charging for these? Should we think about Pearson+ being a more direct competitor to Chegg over time?

Tom, thanks for your questions. I'm not familiar with myself highlighting any issues with an all-you-can-eat approach. I think what's happened is the pandemic has accelerated the shift in consumer behavior from an ownership model to an access model. And very much with Pearson+, it's that ability to provide access at a very affordable price, which is really driving our strategy forward. You saw in the video the involvement of the students. And by the way, we didn't kind of script them. We sort of showed to them and then recorded what they said. So what you saw is kind of their reactions to seeing the app for the first time. And it was kind of interesting to hear them talk about some of the things, the functionality they'd like to see introduced in the future, and we are listening. The other cohort that we've been very engaged with is actually the author community. And we didn't have time to show some interviews we've had. They'll be posted on the website with authors. Again, we've involved them in the creation of this app, very involved in them, and believe this is very beneficial to that community as well. As for your second question, you saw some of the functionality just outlined there by Mike. All of that is included in the very simple pricing tiers, one textbook $9.99 a month, minimum commitment is only 4 months. And if you want the entire library, it's $14.99 a month. Again, minimum commitment is just $14.99 for a 4-month commitment. You can hopefully maybe get a sense as we engage closely with the student population. We start to understand what they're studying, what tools and functionality they want to introduce. As Mike referenced, we actually have a 3-year roadmap laid out in terms of how this app works, not only within the Higher Ed business, but then can extend into Workforce. We can bring in our English Language Learning businesses. There's a very interesting synergy with our Assessment and Qualifications business where you could imagine you could read a text and then take an assessment and achieve a qualification all very seamlessly. There'll be a potential to integrate Mastering, MyLab, Revel, other types of products already from the start as Mike mentioned. If you are a subscriber, and there's some 8 million subscribers to those products in the U.S. Your eText version of that subscription is already embedded into Pearson+. So there's a lot of functionality from launch, but you could be assured that we'll be coming back to you and constantly updating the features and functionality within the app as we move forward in the coming months and years.

Thanks, Andy. Just another couple of questions from Tom as well. So does an aggressive push into a subscription model accelerate the downward pressure on pricing, and therefore, revenues in U.S. Higher Education Courseware in the short term? Sally, I think that's one for you. And then Andy, one for you, to what extent does the Pearson+ proposition appeal inclusive access as a concept?

So I'll take the pricing one first. Obviously, we've done a huge amount of research as we've looked to the pricing for this product. If you look at the 2 ways that a student can buy the product, this is something that we heard back from students was important for them, having the flexibility of either the $9.99 version for just one eText. So over the 4 months, that does equate to about $40 that they would pay for an eText at the moment. The Pearson+ gives them more. Then the multi-version, which is at $14.99, we estimate that a student has about 1.3 books, so it gives us a sort of 70-30 split on that. So this is all designed to maximize revenues for us over time and provide something that's really affordable for the student at the same time.

And to the second question, Pearson+ is a complementary to other distribution channels. What we're really looking at is at the supply side of the equation in terms of, for the first time, allowing students to come directly to us at a very, very, as Sally was just saying, easier, accessible and affordable price and with an app that has an amazing amount of functionality, which will only increase over time. So it is complementary to other offerings that are out there.

Thank you, both. Next question comes from, 2 questions from Adam Berlin from UBS. Sally, probably first one for you. Do you expect the new Pearson Courseware app to be incremental to revenues in the first 12 months or cannibalistic? And then Andy, how does the Pearson+ app integrate with Mastering and MyLabs separate subscriptions?

So on the revenue side, as I said, in this year, we expect it to be relatively neutral as we get access to those consumers. But going forward, this is going to help us to accelerate, recapture of the secondary market. And over time, we also think it's going to increase market share, not just because of the pricing that we've just talked about, but also because of the functionality that it brings to students as well. And I think we also need to remember, this isn't just about U.S. higher ed. That's where we're starting, but we will also be looking to move this internationally, and then it will become a customer acquisition tool for us for things like English and Workforce as well. Andy, second question for you?

The question around integration with Mastering and MyLabs. Is that the question?

No. I think it's around IA, Andy. So Jo, do you want to just repeat the question for us?

Yes, of course. The second question from Adam is, how does the Pearson app integrate with Mastering, MyLabs separate subscriptions?

Yes. I mentioned from the get-go the eText part of that is included within Pearson+. And I think you can get a sense of how down the road it will be possible to integrate our other learning solutions into Pearson+. And then also move beyond higher education and look as a bridge into their career and really start to create a digital ecosystem, a digital learning ecosystem that involves the other areas of the company so that I want Pearson to become the trusted home for digital learning solutions at key moments in an individual's life. And so we really start to lean into this notion of a lifetime of learning. And that becomes, I think, a very, very powerful concept, particularly when we start to expand Pearson+ internationally and start to think about the different products and services that we can offer within that lifetime of learning journey.

Thanks, both. Next few questions, Nick Dempsey from Barclays. He's got quite a few. So I think we'll take them in stages. First question Andy is, if the Pearson+ app will not be on the Apple Store or Google Play Store, how will students access it? Will they download it from your website? And will faculty members be incentivized to direct students to this or will you need a major marketing campaign? And second question, can you give us any indications for your plan to generate new revenue in Workforce Skills and English Language Learning?

Okay. We'll pause there. Thanks very much for your question, Nick. You will be able to download the Pearson+ app from the Apple and the Google Store. They were approved -- both of them approved the app earlier this week. So you will register for the app just as you do for Spotify, for example, via the website. But you will access the app through either the Apple App Store or the Google Play Store. And that will be available when the product comes to market. And you will have the functionality of being able to seamlessly go from laptop to tablet to phone and the app syncs up. So you can go from a large screen experience to something in the palm of your hand seamlessly because everything is synched up into the cloud. Your question around faculty members being incentivized to direct students to this, we're not directly incentivizing faculty members, although there is a large educational plan underway with faculty so they understand the benefits to a student. We believe faculty will see this as a very positive sign, particularly around the area of accessibility and affordability. We do have the option to introduce promotions into the app, and that's something that we're able to test very rapidly. For the first time, we can test concepts, test pricing concepts, A/B test a lot of things. And we're very confident that the faculty, as I said, along with authors, will find this as a really interesting tool. As we develop the tool and develop the app, there will be opportunities for faculty to actually be involved within the app itself. And that, I think, opens up a whole host of new ways of teaching and new ways of delivering content beyond just the eText, but that's something for a little further down the road. And finally, yes, there will be a major marketing campaign to it. But first, what we have to do is really increase awareness for Pearson+ amongst the student population. So as students go back to college, there is a full funnel marketing campaign that is going to break out. The creative we were reviewing yesterday is really, really beautiful, really engaging. So if you are in the target demographic and if you are in the United States, then you will be made aware of the availability of Pearson+.

The question about Workforce and English there, Andy, as well.

Oh, yes. So I don't want to get into too much details above and beyond what I mentioned in my remarks. I'm really enthused about the progress we've been making in both areas. Within English Language Learning, my thinking back in March was really to create a dedicated team to really focus on the opportunities that we have and bring together the existing assets, the global scale of English, obviously, Pearson Test of English and other English Language Learning products that we already had within the company, bring them together and start to build. And the team have done an enormous amount of work over the last few weeks in terms of coalescing that and looking at a number of very compelling strategies. We're really going to be focused on the committed English language learner. And we have some very interesting plans. You're going to have to stay tuned, perhaps for the next quarterly update when we may give you some more information in that regard. And as I said, with Workforce Skills, we've assembled over 100 employees from across the company, and they've created a series of very, very groundbreaking, innovative products. And we've been doing a lot of time -- spending a lot of time talking to some very large and significant corporations about their needs and the ability for Pearson to apply what it has done so successfully in the educational space, in the institutional space, to apply some of those same principles into the corporate world and everything from our Assessment and Qualifications businesses through to the ability to create courseware and provide learning platforms. So very, very encouraged by the progress they're making. And again, I expect you should have more news on that as we get into the latter part of this year.

Thanks, Andy. And just staying with Nick. Andy another quick one for you. Would it make sense to bundle MyLabs with Pearson+ some time in the future? And then secondly, Sally, one for you, changing gears to you, while pointing Professional Certification declining in H2 '21 versus a tough comp, could that flow into H1 '22 or should you be back to growth by then?

Well, as I indicated that Pearson+ opens a world of possibilities for us, whether that is bundling the MyLabs, Mastering, Revel products within it, creating new products, creating new content that sits alongside the eText is something that we're very much focused on. You should think of Pearson+ as a digital learning ecosystem, as a digital learning platform that is going to transform the way that we deliver and interact with initially U.S. higher education students, but potentially a much bigger and broader audience.

And then on Professional Certification, as you said, H2 this year has got that tough comp because we had pent-up demand that we delivered in the back part of last year. I'll tell you more about '22 when we get near at the time, but broadly speaking across next year, we'll see Professional Certification's revenue return to the growth that we expect of what is a great business.

Thanks, Sally. And final 2 questions from Nick. So Andy, one for you, is the slower opening up in international make it difficult to find potential buyers for your school courseware businesses? And Sally, it has always been difficult to raise awareness of new products in higher ed and get faculty interested in these. Can you give an idea how to expect this ramp as a percentage of your U.S. higher ed revenues over the next few years?

Wow, Nick's getting his money's worth this morning. The international courseware businesses are really attractive businesses in and of themselves. And as the team have been working on the perimeter and other aspects of that business, we've been very, very encouraged by the number of unsolicited inbound inquiries. And as we continue to conclude that process, we're very optimistic that given the assets themselves that there would be a great deal of interest if we decide to go down that route.

And then in terms of higher ed and Pearson+ from a product point of view. I think that this isn't a new product in the way introduction of MyLabs might have been back in the day. This is extra functionality for the consumer for an eText product. So I don't think that we've got to then go in and adopt this with professors for the first time. So I don't think you see the same dynamics as for new products in the past. I think you'll see that consumers will see the extra functionality, will download Pearson+ and will enjoy it, and that will help drive market share over time because that will then lead professors to being more interested in the product and adopting our product over time as well.

Thanks, both. And moving to Sami Kassab at Exane. Sally, you've got 3 questions. Firstly, can you please comment on retention trends of the COVID cohort in virtual schools? Secondly, other OPM vendors have and continue to report stronger revenue growth rates, why is Pearson underperforming? And I'll come back to the third.

Okay. Thank you. So virtual schools, as I said, enrollments for the '21, '22 school year, we're expecting to be flat, as I said earlier in the year. Obviously, we've got more data at this point in the year. And what we had expected is what is coming through. So application rates are down. We expected that because of the huge surge we had in applications last year given COVID. But retention rates are up, and those retention rates are on a much bigger base, obviously, that we had last year as well. And those 2 things cancel each other out. As we look to the future for virtual schools, we'll see that return to that great growth rate that we used to in the past as well. And then the second question was on OPM, wasn't it, Jo?

Yes. That's right.

So OPM, underlying growth rate of 11% is good. Obviously, we have these discontinued programs. That drag finishes this year. We're really focused in OPM on operational performance and then driving profitability, and that's what we'll see going forward in OPM. So good, high single-digit growth rate and improving profitability.

Thanks, Sally. And the third question from Sami is, how many Pearson eText are students required to procure each semester? Will Pearson+ result in deflation?

So from a Pearson eText perspective, I mean, they're required to get the product if their professor adopts the products. I think I said earlier that we estimate about 1.3 of those. So that equates to about 70-30, so 70% of people looking for one eText, 30% of people looking for more. So for the 70%, that equates to about $40 they'd be paying for an eText at the moment. And then if you average that out to the multi-subscription, that means that, that's very slightly lower than that $40. But what we've done in terms of this pricing is to look at how we recapture the secondary market and balancing volume and price to make sure that we maximize the revenues that we gain from this fantastic new product.

It may be worth, Jo, it may be worth reminding, in a given year, we reach about 50% of the U.S. higher college student cohort, around 10 million individuals. And each year, there's about 2 million new individuals come in. And over the course of a [ 4-year ] U.S. college period, a student is likely to interact with a Pearson textbook about it. It's over 90% of students are likely to use a Pearson textbook over that time to give you a sense of the size and scale of that opportunity, both on an annual basis and then over a longer period of time.

Thanks, Andy. And then moving to Matthew Walker from Credit Suisse. Four questions, so let's split them in 2s and Sally, one for you. As well as recapturing from secondary market, will Pearson+ cannibalize any of the other higher ed revenue stream? And can you explain thinking behind the economics? And then, Andy, for acquisitions, which of the business lines are you looking at? And why did you not consider buying Stride?

So in terms of recapture of the secondary market with Pearson+, it absolutely will. There will be people who move from some of our products into this, particularly print, but we've already anticipated that pricing mix impact in the past. And of course, we want people to move to our digital products because that's all part of recapturing the secondary market. If people choose to go to Pearson+ rather than IA, that doesn't really have a price differential for eText. And people won't move from our platform products to eText because they are a completely different product. Obviously, the platform product has the homework, quizzes and that sort of thing in it, but they will also have access to Pearson+ as well so that we can build that direct relationship with them. Andy, acquisitions?

Yes. On acquisitions, as you know, we have a healthy balance sheet. So if we feel the need to buy and the right opportunity comes along, we have the capability to acquire. I'm only interested in acquiring entities that will accelerate our growth and fit into the strategy that we've laid out. Above and beyond that, I'm not going to get into any more details or comments about any form of potential targets that are out there.

Great. And 2 more questions from Matt. Sally, were you being too conservative of your flat view assumption in H2? And then secondly, in a 4-month subscription just for the first time and then after, can a student subscribe for 1 month?

So no, given that pent-up demand from last year, I think that flat view in the second half of the year is sensible as for clinical, as I said, and then school assessment, there is a phasing difference.

And then in terms of the 4 months, after you subscribe for 4 months, can you then subscribe for 1 month from Pearson+?

Absolutely.

Yes. Yes. And what we're seeing, by the way, which is interesting, and we've seen this is, students are being flexible in terms of how they are learning. I was talking to a group of students who have decided they want to continue studying during this summer recess because a couple of them said, I want to try and finish my degree by December. And so you're seeing somewhat of a disruption to the traditional pattern. And so Pearson+ and the pricing of that also plays into those students who want to continue to have access to books outside of the course semester. And yes, after your minimum commitment, it's on a month-by-month basis.

Thanks, both. Next 2 questions come from Sarah Simon from Berenberg. Andy, both for you. Is the recent news that a crackdown in education in China likely to have any impact on your business? And secondly, colleges typically share in the revenues of a college bookstore by going direct to students like this. Do you end up alienating colleges or will be paying a share to the colleges' bookstores?

On the China question, Sarah, you'll be aware that we disposed of our -- that legislation is focused primarily on K-12 and around tutoring. We're not significantly -- have a significant presence in K-12. We disposed of those assets in the past. So we see very minimal impact on those reported changes within China. On the bookstore side, our intention is not to alienate colleges. In fact, we believe that Pearson+ is a great tool for colleges and the faculty themselves, as I mentioned before. And so we're providing an alternative distribution channel for access from students through Pearson+. And so we have no plans to be paying a share to either the colleges or to bookstores.

Thanks, Andy. And we've got time for one more question. The last 2 questions come from Patrick Wellington at Morgan Stanley. Sally, U.S. Higher Education Courseware declined by 10%, 12% in the last 2 years. How much better than that is the 2021 performance likely to be? And Andy, why is Pearson+ an innovative method to put in content when Cengage has been doing something similar for 2 to 3 years?

Shall I take the higher ed question, Andy, because I can be quite quick. As I said, we expect U.S. higher ed to be down, but by less than we've seen in previous years, which was minus 12%, I'm not going to be drawn on the specifics. I'll share more on that in Q3.

And as we mentioned in the video, Patrick, both from the pricing itself and the pay-as-you-go model, they're very distinct as to other offerings in the market. Plus, I think, you've maybe got a sense of the user experience and feature set and the opportunity for us to develop and enhance this product going forward and really utilize the breadth and strength of Pearson as a whole. When we start to bring all of that, and we are uniquely the only company that can do that and do that at scale and start to roll this product out globally, I think you'll see that it's a very, very distinct differentiator and a very, very innovative and very unique product in the market. What you're seeing today with Pearson+ is very much the start of a well-thought-out journey. And the products that you will be seeing in the coming months and years will be very different from the one that you see today, and that will be unique within the world of learning.

Thanks, Andy. That's all the time for questions. So with that, I will hand back over to you.

Well, thank you all very much for your interest this morning. And I know Sally, Jo and myself will be speaking to many of you in the coming days. If you have any specific questions, please reach out to Jo and the team. Thanks for your interest, as always, in Pearson. And I wish you a happy Friday and a great weekend.