Pearson plc (PSON) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Pearson's 2023 9-month trading update. Today, we'll host a presentation followed by a Q&A session. [Operator Instructions]. And with that, I'll hand over to Andy.

Thanks, Jo, and welcome, and good morning, everyone. Thank you for taking the time to join us today. As ever, I'd like to allow for as much time as possible for you to ask questions. So I'll quickly run through the highlights from today's announcement before handing over to Sally. We've continued the positive momentum from the first half of the year and delivered another period of strong performance with a 5% increase in underlying sales. This was driven by particularly strong growth in English Language Learning and our Assessment & Qualifications division. We saw solid growth in Workforce Skills driven by the performance of both vocational qualifications and Workforce Solutions. In Virtual schools, we're seeing positive retention rates and applications for our Connections Academy Career Pathways program have been encouraging since its launch in June. Our Higher Education business continues to trade in line with expectations. Now Sally will go into greater detail on the moving parts of the financials, but some key highlights are that inclusive access sales were up 26% year-over-year, and we continue to place focus on growing that part of the business. There's been encouraging growth in our platform products and Pearson+ continues to perform well with around 30% growth in paid subscriptions versus the prior fall semester. As usual, we'll be providing complete metrics for Pearson+ at our full year results. As a result of this continued sales growth and focus on efficiency and operating margins, we are upgrading our full year guidance for adjusted operating profit by GBP 20 million to between GBP 570 million and GBP 575 million. In September, we launched a beta of generative AI tools in Pearson+ and Mastering. These features summarize complex topics and offer students learning prompts and practice questions. While we're still in the early stages of the beta, we've been encouraged by what we're seeing. Students who are using the tools are showing strong levels of engagement with the features, and we're gaining valuable insights about how students want help with their material and their work. Meanwhile, in English Language Learning, we've started a beta of several tools that use generative AI for speaking practice. We believe student expectations around AI will only increase, and we remain confident that Pearson is in a strong position to benefit from generative AI. I'm also pleased that we've started delivering our trusted Pearson Test of English for student direct stream visas in Canada, and we're ready to deliver PTE for economic immigration visas as soon as we receive a start date from the Canadian authorities. We're excited by the size of the opportunity in Canada, and we'll be investing in building our brand awareness in this competitive market. In India, we recently opened one of our largest Pearson VUE testing centers with the capacity to deliver 14,000 tests a month. That's to accommodate the demand for the high stakes testing, including Pearson Test of English. In Assessment & Qualifications, the integration of PDRI continues to progress well with a number of new contract wins for assessment services across the U.S. federal government, including the Department of Homeland Security and the United States Air Force amongst others. Across the business, we remained focused on the execution on all aspects of our strategy, the delivery of our cost efficiency program and on our transformation efforts to build a digital first and consumer-orientated company. To conclude, we've made excellent progress across Pearson and remain confident about our future growth prospects. We're well positioned for the company's next chapter, bolstered by the amazing talent we have here within the group. Now I'll hand you over to Sally, who'll talk you through the financials.

Thanks, Andy, and hi, everyone. We continue to see a strong performance in 2023 with revenue growth, excluding OPM at 5% year-to-date. We're firmly on track to deliver the full year revenue growth we guided to at the beginning of the year and anticipate being in the upper end of that guidance range. We're also raising our profit guidance, the details of which I will talk through in a minute. The divisional revenue highlights follow the themes we have guided to. Assessments & Qualifications revenue grew 8%, driven by an excellent performance in Pearson VUE, particularly in IT and health care. There was also good growth across U.S. student assessments, clinical and U.K. and international qualifications due to new contract wins, good government funding and price increases. Following the disposal of POLS within OPM, our Virtual Learning underlying growth is reported excluding this part of the business. The Virtual Learning revenue decrease of 20% is therefore driven by the loss of the ASU contract, which will, as expected, continue to impact growth in Q4. Virtual schools revenue declined 4%, impacted by the loss of the major school. Excluding that, enrollments were up 2%, demonstrating an underlying return to growth following normalization post COVID. Whilst this trend for enrollment is positive, as we move into 2024, we should remember the business will be impacted by the loss of a further large school in the '24 to '25 academic year. Higher Education revenue was down 5%, in line with expectations, driven by pricing mix and the anticipated deferral of revenue into Q4 given the growth of Pearson+ and platform products. Excluding the revenue recognition phasing impact, revenues declined low single digits, in line with our expectations for the full year. Recently published NSC data suggests 423 enrollments in Pearson's addressable market are up 1%, meaning the impact on enrollments in the year-to-date financials is flat. You may have seen that the NSC headline was growth in enrollments of 2%. The difference between these 2 data points takes into account undergraduate certificates, a market Pearson is not in, and the weighting of 2-year and 4-year colleges and freshman students. Clearly, both data sets are hopeful, if not yet a trend. English Language Learning revenue was up 34%, with Pearson Test of English continuing to perform strongly across most markets. Our institutional business and Mondly also delivered strong growth. Workforce Skills revenue grew 8% with solid performance in both vocational qualifications and Workforce Solutions. Turning to the group outlook for the remainder of the year. Full year group revenue growth, which we have guided to, excluding OPM, will be at the higher end of the low to mid-single-digit range we've guided to. Virtual schools and Higher Education growth is expected to be in line with the guidance we gave at prelims and interims. Assessments & Qualifications growth will be mid-single digits. English Language Learning growth will be at least 25% and Workforce Skills growth will be high single digits. We're investing a portion of the English Language operating leverage into growth opportunities, and that will continue into 2024 and beyond. We are upgrading our full year adjusted operating profit guidance to GBP 570 million to GBP 575 million. This is at the current trending average pound to U.S. dollar FX rate for the full year being $1.24. Previous guidance as published on Vuma was GBP 568 million at dollar-pound rate of $1.2, which equates to GBP 552 million at the $1.24. The upgrade to GBP 570 million to GBP 575 million of circa GBP 20 million is driven by the expectation that revenue will grow at the higher end of that guided range. We remain on track to deliver GBP 120 million of cost efficiencies in 2023, with group margin to improve to mid-teens. Our tax rate is expected to be in the range of 23% to 24%, and the interest charge is expected to be circa GBP 35 million. As usual, we will provide guidance for 2024 with our full year results. Our GBP 300 million share buyback is progressing well, and our financial position remains strong. And finally, we look forward to seeing many of you at our investor seminar focused on our Assessments & Qualifications business, on Monday, the 6th of November. The event will be held in person at the New York Stock Exchange and also virtually for those unable to attend in person. And with that, I will hand back to Andy.

Thanks a lot, Sally. So as you've heard, we've delivered yet another quarter of growth and strategic progress. And to reflect that strong performance, we upgraded our full year guidance. Now this is my last earnings presentation as CEO of Pearson, and I want to thank all of you for your interest and support across the last 3 years. In particular, I respect and appreciate the recognition that the Pearson of today is a very different company from the one I joined 3 years ago. The really exciting part of this story is that we're only just beginning. When I became CEO, I had one primary objective to set this company up for sustained growth. What comes next is extremely exciting and will play into the unique assets that Pearson possesses. I'm truly delighted that we've been able to appoint Omar as Pearson's new CEO. He is, in my mind, the right person to build on the company's success to date and its journey of transformation and growth as a digital consumer-focused business. In the meantime, we remain focused on moving the company forward and building on the solid foundation that we have in place. There's a lot of momentum across the business. The whole of the company is working together with an unwavering focus on execution. So we're well placed to keep building trusted relationships with consumers and delivering value for shareholders, underpinned by a robust strategy and a leadership position in sustainability. And with that, Sally and I will be happy to take your questions. Jo, over to you.

Thanks, Andy. I can see quite a few people on the line. So operator, can we take the first call, please?

Our first question for today comes from Luke Holbrook of Morgan Stanley.

Just a few from my side on Higher Ed. I guess the first one is, can you just give us a bit more detail on what's pricing mix versus the revenue recognition part and how that looks Q3 to Q4 given the 8% decline in Q3? And the second is, can you just comment a little bit colloquially on what you're seeing on print and platform, maybe versus the textbook in the segment? And then just finally, are you noticing any cannibalization at all from Pearson+ and how that fares versus the eTextbook business?

So for you, I think.

Shall I take the first 2, you take the last one then...

Yes, that's fine.

So the pricing mix point is one that we've talked about before as the business moves from a print business to a digital business, it moves out of the higher price point, print and packaged products into the lower price point, eText and platform-only product. As we've talked about before, that is something that has a flaw to it. So we saw a decline in print and packages we were expecting in Q3. And I'd anticipate that by the end of the year, we've got a million or may be less from a units perspective in print and package. And then the rev-rec piece is the piece that I highlighted at interim, so completely as expected. As we move into digital, we recognize the revenue over a period of time, which crosses over Q3 and Q4. And therefore, whilst it's kind of built in the third quarter, the revenue recognition from a top line perspective is over those 2 periods. So we've got a proportion that's moving from Q3 to Q4 as our digital products grow. And from a Q3 specifically point of view rather than year-to-date, that revenue recognition is around about the same number between Q3 and year-to-date. And then you've got a denominator which is smaller for the quarter than it is for the full year, and hence, the percentage. And then on the print and platform versus eText piece, I mean that's exactly the portion that I was talking about in terms of that pricing mix. You've got, as expected, a shift out of print and packages into our digital products, so Pearson+ platform and eText.

And Luke, as regards to Pearson+, as I mentioned, 30% year-over-year Q3 growth in subscriptions, 80% growth year-to-date. So that gives you a sense of the growing importance of Pearson+ within Higher Education. What's also very, very encouraging, and I referenced, is the study tools within Pearson+. You're seeing Pearson+ evolve beyond just an eText reader. We started last year with channels, not only academic channels, but of course, life skill channels. And with the addition of generative AI within the study and channels piece, linking video to questions that students are having, we're seeing a real take-up and a constant evolution in that space. And you're going to see also an increasing role for Pearson+ in terms of inclusive access. And you'll start to see that as we roll through into 2024. We are starting to see that this year, and you'll see more of that as we roll into 2024. It's all about being student first, consumer first, totally digital. And what I love about Pearson+ is it's a constantly evolving product. It's not a fixed product. It's constantly evolving. Every other day, I'm getting screenshots from Tony about what about this? How do we do this? So I'm very, very excited about the road map for Pearson+ and some of the other things beyond Higher Education that the team are working on busily in the background. Operator?

Our next question comes from Adam Berlin of UBS.

It's Adam Berlin from UBS. Just 2 questions for me, please, if I can. Just on Higher Ed again. Did you win adoption share in this full kind of sales process given the investments you've made in products because that was something that wasn't in the release. So just helpful -- maybe you don't have all the data right now, but what do you think happened in terms of adoption share into this full season? And the second question, just on Workforce Skills and Workforce Solutions. Can you give us a kind of update on where the feedback is for your Workforce Solutions software product. I noticed the Q3 growth was a little bit slowed down for the Workforce Skills Group as a whole. Is the guidance, the double-digit growth in Workforce Skills still relevant?

So I take the first one and you take the second?

Yes.

So in terms of adoption share, we do have a dataset. But as you've just said, it's quite early on in the process. So we've only got about 60% of that data set. And because of the way it's pulled together by an external party and to do with a very boring IT thing, one of the big retailers isn't in there yet. But the indications from our early dataset is that we've maintained market share, but we'll -- I'll update you more once we've got the full dataset at the full year.

And as it relates to Workforce Skills, Adam, and particularly Workforce Solutions. Of course, there are 2 parts to the Workforce Skills numbers. The first is essentially our vocational qualifications, BTEC. And then the Workforce Solutions, we're seeing good growth in the Workforce Solutions. And I think that's the area that you're particularly focused on. In fact, Sally and I meet with the team weekly, and I'm very encouraged by seeing the progress that's been made in terms of both the number and the quality of clients we're getting in the pipeline -- in the sales-lead pipeline, increasing size of contracts. And the decision to move, as we mentioned, at interims to a more modular solution sell is really starting to pay off because every company -- and it's not just companies, by the way, it's also governments, are interested in tailor-made, bespoke solutions to their particular challenges. And when they get to see us create bespoke solutions, we really see a good product-market fit. So I feel encouraged by the progress that the team is making. There's no doubt there's increasing demand as more and more companies, governments and other institutions become aware of the need. We're moving to, as I've often said, a skill-based economy. And more and more enterprises, institutions are looking for answers to help them solve their skill-based problems. We are a perfect fit for them. Operator?

Our next question comes from Tom Singlehurst of Citi.

Tom here, from Citi. And thank you very much for all the hard work over the last 3 years. You've been unfailingly enthusiastic and energetic so it's very much appreciated. The first question is on, in particular, English Language Learning, both A&Q and ELL have been very strong in the quarter. You've raised the full year guidance, but I suppose both require a significant slowdown in the fourth quarter or imply a significant slowdown. For A&Q, you already flagged some timing issues there, but for ELL, what are the moving parts there? I mean, are we just moving into a faster natural level of growth because of the opportunity in Canada? And does that alter the midterm guidance? That's the first question. And then a second one on virtual schools. I mean the underlying performance in the third quarter looks like it's fairly okay, but you obviously have lost the contract, which we already knew about. And I think, Sally, you mentioned you've lost another one for '24-'25. So could you just talk about the competitive dynamics there and what's driving the contract losses and how they might be mitigated going forward?

Should I take both of those?

Yes.