Pearson plc (PSON) Earnings Call Transcript & Summary

[Audio gap] Pearson VUE addresses this trend head on, supporting certifications in high-demand industries like IT and healthcare. And thirdly, there's a [Audio gap] in the form of an accreditation or certification. Again, this is where Pearson VUE shines and where our schools and clinical businesses also deliver trust [Audio gap] [ friends ] are creating opportunities right across Pearson. So today's presentation will demonstrate that A&Q is an extremely high-quality business with a vital role [Audio gap] is well positioned to drive revenue growth both now and in the years ahead. You also see the underlying stability and consistency of this business, a reflection of its trusted customer relationship... [Audio gap] Pearson. And finally, you see its exciting financial trajectory, underpinned by high returns and cash generation. So let me stop there and hand over to Art and his team for a deeper dive into all that is A&Q. Art?

Thanks very much, Andy. Good morning, everyone. Thank you for joining. [Audio gap] of our Assessment and Qualifications business is a winning combination for all of our stakeholders. Let me start out by introducing you to the team. You'll first hear from Gary Gates, who has played an integral role in building Pearson VUE into a global leader into a global leader in the test delivery space. Next up will [Audio gap] that play a critical role in the education of young students. After Sharon, I'll talk about our clinical business, which helps professionals assess people across a wide range of developmental areas to understand how they learn [Audio gap] performance and investment for continued growth and enhanced profitability. Let's talk about the fundamental aspects of this business that we'd like you to take away from this morning. Our products and services are sold all over the world, representing [Audio gap] greater geographic reach than any of our competitors [Audio gap] respective markets. And our ability to deliver large volumes, multiple languages [Audio gap] a combination of our market-leading offer with excellent customer relationships, built on trust, ensures long-term contracts and outstanding renewal rates. A&Q is Pearson's largest business, delivering consistent revenue growth, strong margins driven by sharp operational management, and supports the group's excellent [Audio gap] a moment on the final one of our key drivers [Audio gap] It makes a real difference in people's lives. We're trusted by millions of individuals around the world. You'll hear some examples today of the many ways in which we help organizations and individuals through their educational journey. We're made up four businesses. Pearson VUE is the largest, operates in the [Audio gap] of $15 billion to $20 billion in the training and preparation space. Our school assessment and qualification [Audio gap] million with a market share that approaches 25%. Finally, our clinical assessment business plays an invaluable role supporting learners and patients of all ages. Like our other businesses, we have a set of [Audio gap] teachers and other professionals to measure general and social and emotional well-being across all ages. [Audio gap] with the number of psychologists expected to grow 6%, and [Audio gap] last year, A&Q generated GBP 1.4 billion of revenue with margins of 18%. We delivered 90 million tests. This year, revenues are expected to grow mid-single-digits. Before I hand over to the team, I wanted to spend just a moment to highlight how the power of assessments extends across the rest of Pearson. These capabilities are at the heart of our growth and drive results across all parts of the enterprise. Whether it's the use of the Pearson VUE technology and physical infrastructure to deliver the Pearson Test of English its outstanding growth, the combination of our higher education learning content with VUE testing to offer professionals a full-service path to technology certification or the use of our school assessment's AI engine to score SA exams in our English language portfolio, our capabilities are driving growth throughout the enterprise. Let's turn now to my colleague, Gary, to hear about the VUE business.

Many thanks, Art, and good morning, everyone. It's a great pleasure to be here today. At Pearson VUE, our mission is to deliver high-stakes exams to industries that can advance their professions and safeguard their communities across the globe. We help learners obtain a professional certification or license so they can advance their education or career journey. Simply put, we turn learners into earners. Pearson VUE is a global provider of computer-based high-stage testing services. We deliver more than 19 million certification and licensing exams annually. That is an exam every 1.6 seconds. We offer our customers a multimodal approach to exam delivery, from remote proctoring to testing in one of our 20,000 testing centers, we have the most comprehensive test center network in the sector with more test centers than our two biggest competitors combined. We also provide our customers with a full suite of additional services, including content development, psychometric services and security services. For example, customers like the National Council of State Board of Nursing, who have a clear mission to ensure medical providers are confident, come to Pearson VUE because we are trusted to provide their candidates with a firm, reliable and secure testing experience. A test taker in New York will have the same testing experience as a test taker in Manila. Let me quickly touch on our recent financial performance. In 2022, Pearson VUE had -- had GBP 575 million of revenue. And through the first 9 months of 2023, the business has delivered growth -- strong growth of around 11% on an underlying basis. We are on track for continued growth through to 2025. Now as you can see from this chart, Pearson has a diverse portfolio of over 550 clients with a strong presence across an array of sectors, including technology, healthcare, finance, professional associations and many others. This provides resilience against economic swings for always in-demand areas such as nursing, pharmaceuticals, emergency and medical technicians and all other healthcare professions. Now we typically sign multiyear service contracts with our clients and have strong customer retention rates. Our contract renewal rate was over 99% last year, and we've had -- and we have many long-term relationships of over 5 years or more. As you can see from this slide, Pearson VUE has seen consistent, strong growth over the last 20 years, driven by new contracts, strong retention rates and the breadth of our portfolio. We are really excited about the growth prospects of Pearson VUE, and we are focused on three strategic initiatives. The first of these is investing in our platform to maintain a high contract renewal rate to win new customers and to realize opportunities for IP ownership and geographical expansion in regions such as India, Southeast Asia and Africa, and also through cross-divisional partnerships, the most notable of those being the Pearson Test of English. Our second has been our expansion into the U.S. federal assessment market with the recent acquisition of PDRI. And the third is the investment we are making in the expansion of VUE's service offerings. I'd now like to spend a couple of minutes talking you through each of these initiatives. Let me start with PTE, which is a really great example of collaboration with Pearson's English Language Learning division. PTE is a digitally AI-scored four skills test of English for study and working abroad or for other immigration purposes. It's also one of the fastest-growing products in Pearson. PTE operates in a nearly GBP 1 billion market, and is a strong position as a top 3 player. PTE is well established in Australia and the U.K. for study and immigration, and is well positioned for growth, having recently received recognition from the Canadian authorities. The test is delivered via the Pearson VUE platform and leverages VUE's global test center network. We continue to invest in our test center network to support the growth of PTE. And only last month, we announced the opening of one of our largest [VUE] test centers in India with the ability to simultaneously accommodate 90 candidates and deliver more than 14,000 [ tests a month. ] The partnership we have with PTE ultimately strengthens both of our businesses, utilizing VUE's infrastructure to drive growth for PTE and Pearson as a whole. Now moving on to PDRI. PDRI has built a strong reputation for quality talent assessments, including tailored assessments to support U.S. federal government hiring. The U.S. federal government is one of the world's largest employers in the world with more than 4 million professionals. Its U.S.A. Hire platform serves more than 40 government agencies and is used to assess more than 0.5 million applicants annually. PDRI has delivered strong results at the end of Q3, supported by the growth from the recent contract to provide selection tests for the [ TSA ]. This contract also leverages the VUE test center network to deliver the assessments. Now we're also seeing strong momentum going into 2024 with recent contract wins, the most noticeable being a 5-year contract to provide the U.S. Air Force with motion assessments. This partnership exemplifies the additional assessment opportunities we can offer the federal government while we're also seeing the potential for cross-selling opportunities with our Workforce division. We could not be more pleased to have the PDRI team on board. The integration has progressed well. They are profit-accretive and have contributed to growth by bringing new partners on board. Now the first... [Presentation]

Okay. That was a video showing the third and final strategic initiative I would like to highlight. And this is the opportunity for Pearson VUE to move up the technology value chain. As we all know, growth in the technology sector continues to compound at a rapid pace. Because of the high demand for training and prep materials, we're expanding VUE's core service offerings. We're transitioning from an exam delivery provider to a broader value-added full service provider. We will service our customers, channel partners and test takers across the entire learn, practice set of our life cycle. We believe this will open up the potential for Pearson VUE to access a $15 billion to $20 billion certification prep market. We are well positioned to win in this highly fragmented, adjacent market for several reasons. First, we are seen as the authority in the test delivery space. Second, our market expansion is straightforward through our existing network of training and testing centers. Third, we have long-standing relationships with in-demand technology certification partners. And last, we have the unique ability to leverage our wider learning experience. We've been working in partnership with our Higher Education division to support a series of [ Cir Prep ] courseware products. And you've actually seen the highlights of that in the video that we just showed. Our [ Cir Prep ] offering is a vital step in becoming a full-service provider, offering learners prep material all the way through to test delivery. So in summary, Pearson VUE is a global leader in high-stakes computer-based testing with a strong, diverse portfolio of customers and the most extensive test center network in the sector. We have seen strong growth in 2023, and we are on track for a continued growth as we expand our core offerings and capitalize on the opportunity to move up the certification value chain. And with that, I would like to hand over to my colleague, Sharon.

Thanks, Gary. Good morning. My name is Sharon Hague, and I run the School Assessment and School Qualification businesses at Pearson. These are purpose-driven and trusted businesses focused on helping K-12 students at a critical time in their lives. So let me explain briefly a little bit more about what we do. In the U.S. School Assessments business, we provide the technology, operation, content development, psychometric and scoring services to deliver assessment tests in schools from grades 3 through to 8 and then on to high school and college readiness. We are experts addressing the complex and differing state-level accountability criteria, customizing programs to meet each state's unique requirements and delivering these services under contract over a multiyear period. The impact of this business on educators and testing statewide requires a relentless focus on quality and a high degree of trust. In the U.K. and international markets, we provide globally recognized qualifications, including GCSEs and A levels. We help students at the end of two phases of secondary education in the British curriculum. GCSEs and international GCSEs are typically taken at the age of 16 in approximately 8 subjects per student. A levels and international equivalents are taken at the age of 18 and enable entry into university or on to employment. The GCSE or A level itself includes the curriculum, the assessment and the certification. And teachers choose whether to use the Pearson qualifications or those from a couple of other providers. In addition, this business also provides the print and digital teaching and learning resources that support teachers in delivering the correct [indiscernible]. The content is owned by Pearson, and we are known for our high-quality math offering and are also a leading provider in history, business and economics. The impact of the work that we do on individual students means that this is a highly trusted business with an absolute focus on quality. In both businesses, we provide the data that can assist with the continual improvement of education standards, helping governments and schools understand the overall performance of students. And for the students themselves, the outcomes of these assessments and qualifications help them in the progression of their learning journey. Our U.K. and international qualifications are recognized globally by universities and employers, enabling student progression and importantly, strengthening the Pearson brand. Now the primary and secondary education landscape is very dependent on government policy, which evolves over time. When policy changes are implemented, it happens over a long cycle, which stimulates demand over a multiyear period as both governments and teachers seek support in implementing the changes. Importantly, there are exciting opportunities for growth. K-12 is very important to governments at a local level and all the way up to federal level. The relationships and trust we are able to build with a broad range of stakeholders, including governments, supports Pearson more broadly, strengthening our brand. So let me quickly highlight how these units have been performing. U.S. School Assessment delivered revenue of just over GBP 360 million last year and is up 8% through the first 9 months of this year. Meanwhile, U.K. and International Qualifications delivered GBP 245 million of revenue in 2022 and is also growing 8% so far this year. Going forward, we expect this unit to grow due to our international qualification offer and product launches. So on to our competitive advantage. So some of our key competitive advantage are: firstly, our strong in-market position. We have an incumbent advantage both in the U.S. and the U.K. Secondly, our scale enables us to innovate. For example, in on-screen assessment, and we have access to technologies that we can use to leverage the expertise that exists in other parts of Pearson, for example, in Pearson VUE. We're also experts at managing a range of stakeholder expectations and are an important trusted advisers. Our stakeholders include students, parents, teachers, schools and governments. And our ability to understand and share best practice globally is an advantage in becoming increasingly important in K-12 education. We share across the two business specialist capabilities such as content production, scoring, assessment design, and we can leverage those across all of the markets that we operate in, but always meeting the specific government standards. And most importantly, all of this is done at scale. We deliver millions of tests a year and manage the very many different stakeholder relationships and expectations in a range of markets. Now I mentioned earlier the opportunity for growth in our International Qualifications. So let me walk you through this opportunity in a little more detail. Global demand for British education remains strong. Parents and students want internationally recognized qualifications that can provide access to the best colleges and universities around the world. Internationally, we're bringing to market innovation in high stakes assessment. We were the first exam board to provide on-screen assessments in both GCSEs and international GCSEs. And in addition, we offer modular and linear routes to completion. In the last 8 years, we have significantly expanded our global presence. The number of schools that we are working with has nearly doubled, and we have expanded to an additional 24 markets. So we expect this growth to be driven in the following three ways. Firstly, we continually analyze our markets and make sure that we focus on the ones with the most growth potential and are dedicating resources to those markets. Secondly, we'll use our technology capabilities to launch innovative, future-ready assessments. And thirdly, we can win and retain business through our fantastic team and relentless focus on a superior customer experience. So thank you for your time, and I'll now hand over to Art. Thank you.

Thanks very much, Sharon. The clinical assessment portfolio. This part of our business helps professionals assess learners and patients across a wide range of developmental areas. A couple of examples: determining if a child shows signs of conditions such as ADHD, autism or dyslexia; assessing learning and cognitive traits such as memory, language processing, spatial recognition, behavior traits and other attributes to guide future support. We're evaluating general personality traits to help make high-stakes decisions, such as hiring someone for a job in public protection, such as a police officer or a pilot or determining someone's suitability to obtain child custody as part of a divorce settlement. This blue-chip portfolio of intellectual property drives much of the competitive advantage have. We offer hundreds of products in the market to support this very broad array of needs. The increased awareness and acceptance of general mental health services and government funding for tools to assess cognitive language and learning capabilities have enabled more clinicians, teachers and learners to benefit from our offerings. This is all happening on a global scale. Our products are adapted and sold around the world. We have a particularly strong position in North America, Europe and Southeast Asia. In '22, clinical assessments delivered GBP 262 million of revenue. Year-to-date, this unit is growing on a 4% underlying basis. Now let's spend a moment taking a peek at a video of our digital delivery platform, Q-interactive. First, and most important, this is going to give you a short view of the setting in which our highly skilled and compassionate customers use our products to help the development of learners of all ages. [Presentation]

That digital capability that you just saw is at the center of our growth story. Let me talk a little bit about some of these examples. The digital assessment library for schools, [indiscernible], is in market today for U.S. school districts. This innovative offering provides a subscription for use of our entire digital library of assessments for all students in the district to qualify. We've seen this offering grow 95% over the last 4 years with an exceptionally high retention rate of over 90%. We're continuing to invest in this offer, with plans to make it available outside of school districts, for example, private health practitioners and upcoming releases. Clinical pharmaceutical trials are another source of promising growth. Our tools provide great value as part of global drug trials. They're used to help measure various traits of trial participants, helping to measure both the direct efficacy as well as potential side effects of the drug that's being tested. I hope this gives you a good overview of our clinical business and the drivers of its growth going forward. And with that, we'll hear from our A&Q Finance lead, Mary Kemp and some specifics of the overall performance of the business. Mary?

Thanks, Art, and good morning, everyone. It's my pleasure to highlight how our strong competitive position, scale and services are translating into strong financial results. Looking back at 2022, A&Q delivered strong results with underlying revenue growth of 8% and an operating profit of 18%. Last week, we reported strong year-to-date 2023 performance, sales up 8%, driven by solid growth in each business unit, particularly strong results from VUE. We also raised our outlook for the year and now expect mid-single-digit revenue growth. In addition, we're on track for profit margins to increase in 2023. I want to also emphasize that in many of our units, we have strong visibility and predictability into our revenue and returns on continued investment. This visibility was demonstrated with some of the points my colleagues mentioned earlier. Specifically, we have strong relationships with our VUE partners. And as Gary mentioned, the business consistently has a retention rate in the high-90s. As Art just spoke to, for clinical, the business is increasingly shifting to a digital subscription model, where we have an exceptionally high retention rate of over 90%. Putting this all together, we have strong visibility into a high proportion of our A&Q revenues, which helps us to manage the business and guide our future financial performance. Now let me touch on the investment priorities. Our goal is to continue delivering strong growth and contributing to strong return on capital and cash generation for the group. As a result, we prioritize our investments in two ways. We invest to maintain that strong end market position, and we'll invest in those strategic growth opportunities where we can expand into new segments, geographies and services. For instance, the acquisition of PDRI, which Gary mentioned, which significantly expands Pearson VUE's services to the U.S. federal government. It is profit-accretive and also contributes to growth by bringing on board new key federal agencies. In our Clinical and Student Assessment and Qualifications businesses, we are investing in our product offering. Art and Sharon discussed earlier, how we're bringing innovative products to market to serve both existing needs and areas of growth, with examples such as the future-ready assessments and international qualifications and a continuous pipeline of products and clinical, along with new digitally enabled business subscription models. Collectively, the investments we are making today enable us to maintain our strong market position while also setting us up for continued growth in the years ahead. We continue to be disciplined in our investments and rigorous in our focus on securing those required returns. Let me now turn to our margin performance and how we can further improve this. We are very proud of our 18% margin. While we want to continue delivering strong top line performance, we want to do so profitably. Our margins are on track to increase in 2023 and through to 2025. There are 3 levers that will be key to driving this improvement. First is through operating leverage on sales growth. As our top line grows, we see strong drop through to profits. Second, as we invest behind our products and continue to bring innovations to market these premium product support margin expansion. And third, we're always looking at ways to deploy innovation, particularly generative AI, to drive cost efficiencies across the business. With that, I will now hand it over to Sally.

Thanks, Mary, and good morning, everyone. Today, I want to highlight our recent 9-month results and the importance of A&Q within it, the exciting growth opportunities we have ahead and our investment case. So starting with a quick overview of our strong third quarter update that we presented last week. I'm not going to run you through all the details again, but I will outline some key highlights, including the continued momentum we are seeing across the business with a particularly strong performance in both PTE and Assessments and Qualifications. As you've heard, A&Q is our largest business. So the underlying revenue growth of 8% that it delivered in the first 9 months of the year was the largest guidance for A&Q this year, which, in turn, has driven an increase in our group level growth expectations. And with a strong drop-through from revenues to profit, we have also increased our full year adjusted operating profit guidance to GBP 575 million. Having talked about the contribution that A&Q is making to the current year, I'll now turn to our medium-term outlook. As a group, we plan to deliver mid-single-digit underlying revenue growth across the 2022 to 2025 period. We also expect to reach a group level 2025 adjusted profit margin of 16% to 17%, which will represent a meaningful improvement from the 12% we delivered last year. One factor that is not widely known about Pearson is our attractive cash dynamics and improving return on investment, both this year and through to 2025 and a return on capital well above WACC. Needless to say, our ambition stretch well beyond 2025, and we see a range of opportunities to drive sustainable top line growth and margin expansion not only through organic growth but also from significant synergies and cross-selling opportunities across our portfolio and Enterprise Products. We have a disciplined approach to capital allocation. And thanks to our strong balance sheet and excellent cash generation, we are well positioned to invest in future growth opportunities, whilst also returning cash to shareholders through our dividend policy as well as the current share buyback. Hopefully, today, you will have gained a greater sense of those opportunities which will drive long-term shareholder value through sustainable, profitable growth and higher returns. So why invest in Pearson? As you've heard, we operate in a growing market where no other company has the breadth and depth of our assets. We have a strong competitive position, giving us unique advantages of being able to offer one-stop solutions to our customers. Our strategy centers around a lifetime of learning with are starting to build into connectivity between our divisions, but with much more opportunity to drive customer acquisition potential. Each of our core financial KPIs is growing: sales, profit margins, free cash flow and return all supporting realization of our purpose. Our ultimate goal is to help people learn, a fundamental need for human progress. We hope you've enjoyed the presentation today and learning more about Pearson and about A&Q. And with that, we would be happy to take your questions, but there will be a short pause when you will begin. Thank you.

We're just going to rearrange the furniture. So get your in-room questions ready, ladies and gentlemen. And please, if you do have a question in the room, raise your hand and wait for the microphone so that the folks listening and watching online can hear your question as well as the answer. So I think we're ready?

It's Luke Colberg from Morgan Stanley. My first question really just comes from an M&A standpoint because you just discussed a lot about organic growth opportunities. And also what PDRI brought to VUE, how are you thinking going forward on the possibility for the M&A to help accelerate some of the opportunities that you see in front, maybe that's for Art or Gary as well. And then the second one, I think, would be helpful to get an understanding, a little bit more on the market share dynamics, specifically within, I think, VUE or U.S. Student Assessments, and how those have trended over the last few years. You discussed about opportunity into 2024, in particular with you. So again, just getting an understanding on that front as well.

Art? Would you like to lead with the M&A question? Can be both questions, I think.

Yes, makes sense. Nice to see you, good to have you here today. We do feel great about the progress that we're making with PDRI. I suspect that came through well during the remarks that we had. We do have a strong balance sheet. But as of right now, we are not planning any material M&A, but we're always scanning the market and put ourselves in a position to react to opportunities as they come up.

On market share?

Yes. In terms of market share, VUE and School Assessments are two very good examples to call out because those businesses are almost exclusively won by competitively bid contracts. And our market share performance is very good in both of those businesses. The number of bids that are available is discrete enough that we can track our performance pretty well, and we're doing extremely favorably versus the competitors in winning both new bids and ones that are up for renewal, as you saw by the outstanding renewal rate that we have. So very good news to report on market share on those two.

And I'd just add, hopefully, you will get a sense of the scale of these businesses. The unique IP that all of the businesses have which is going to become increasingly important and increasingly valuable as we go forward. And the fact that we continually invest both in products, in testing centers, as Gary referred to. So in our infrastructure, our digital capabilities. And when we have an opportunity like a PDRI is a great example that adds to the existing portfolio of assets, and is accretive to the business. And opens up a whole new market sector for us or whether in international assessments, school assessments, geographical expansion. We're constantly looking at the best ways to utilize our existing capital, not necessarily just buying -- doing M&A for the sake it.

Next question, gentleman in the back.

Matt Saltzman, also with Morgan Stanley. Could you just talk a little bit about how you see the competitive dynamics in the U.S. federal space and some of the initiatives you have in place in addition to the PDRI acquisition in terms of going after that market opportunity?

Gary?

I think what I would say is, as we said, the PDRI acquisition's gone really well. And they've really got a unique position in the market because the sort of the expertise we have with PDRI really fits well with the federal market because I think it's a bit fragmented and bringing that together. And also coupled with the synergy with our Pearson VUE network really brings -- really helps us in terms of progressing that market. And as I highlighted in the presentation, we won some contracts very recently, particularly in the U.S. Air Force, which shows that we're really gaining market share there. So we're really excited about the opportunity. They're expanding a vertical, which we have played -- played very little in. So I think we've got a real opportunity to push that forward.

Right. Any other questions in the room?

Then we'll go to the operator and the -- Elliot, Any questions online?

[Operator Instructions] Our first question comes from Adam Berlin with UBS.

I had three questions, if I could. First question, I was interested what you're saying about international expansion of Edexcel, your GCSE and A level business. Can you tell us a bit more about which markets you're targeting for that growth? And maybe you can share a little bit more about how big that international revenue is today and how fast it's growing? That would be really helpful. That's the first question. The second question is on Pearson VUE. As you said, you've had a really strong performance this year, up 11%. It's almost like 2 years of growth in 1 year. So just wondering, as you think about 2024, should we expect a much kind of more flat year next year, just given how strong it's been or do these initiatives you talked about meaning we could have another strong year of growth, trying to think that through. And thirdly, you talked about drop through to profit in A&Q revenue growth. Can you give us an idea of the range of drop-through on profit? I know there's cost savings coming in this year will make it a little bit different. But just to say beyond 2023, what's the right drop-through we should be thinking about on the operating leverage in A&Q growth.

Shall I take that last question and then the first one for you, Sharon? And I'll pick up on VUE and you can complement, [if you like to have]. So from a profit drop-through perspective, you've heard me talk before, Adam, about the cost savings that have come through this year that are driving that margin improvement this year. Obviously, we've got operating leverage coming through from our trading growth as well. And then as we look out from 2023 to across that '25 period, that margin improvement coming through from operating leverage. And across the investments and qualification business, the way you look at operating leverage is between about 40% and 60% with VUE being at the lower end of that with a smaller kind of fixed cost base underneath it and clinical assessments being at the higher end of that range. So hopefully, that gives you a good idea. And then from a VUE perspective, obviously, an amazing performance, up 11% for Q3 this year, I think we've always indicated that VUE is a mid-ish growth over the '22 to '25 period initiatives that Gary has talked about so that kind of expansion into the vertical with a with PDRI growing with the other investments we're making in the kind of base business, I think there's a lot of opportunity for us to accelerate that in the future.

Thank you. So on the international expansion, I mean, the first thing I would say is we keep the markets under a continuous review. As you know, in the international space, opportunities can emerge quite quickly. So we're continually reviewing where we're prioritizing and where we're focusing. You can see from the presentation that we've expanded the number of countries that we operate in from 90 to 114 over the past few years, and we expect to continue to do that as well as deepen the relationships that we have in existing markets. We have some very strong relationships in a number of existing markets, and we're seeing really good growth there. And the way we're doing it, I think is really exciting. So not just that focus on where we're operating, but also on the offer that we have. And we're really positioning ourselves as the innovative example with different routes to completion of the products as well as different modes of assessment, which in many markets where young people face quite an uncertain future and really need to make sure that they have the skills to enable them to progress their careers. In a world where many of the jobs that they'll be doing don't even exist now, that innovative approach is very, very appealing, to both parents as well as the schools themselves. We do have a fantastic team on the ground. And I think another element to this is that we really are able to leverage our centralized capabilities to then deploy in very many markets around the world. So that expansion is really about people and having people in markets and building the relationships, which we know we have a really strong track record of doing and have a fantastic team to do that.

Should we move on to the next question, operator, please?

Yes. [Operator Instructions] I have no further questions. I now hand back to the room.

Andy, I'll take a couple actually from the platform. I've got one from Sami from Exane. I'll break it down into different questions. So first part, can you please provide a revenue breakdown of Pearson VUE by vertical and how big is technology for this business? Second question from Sami is can you provide some comments on the calendar of U.S. school state testing contract renewals when are California, Texas and Florida are up for renewal?

Okay, who wants to break down the revenue by vertical? Sally?

I think on one of the slides in the pack, we did that for you actually. So you can see some of the larger segments in technology across the healthcare sectors. You can see the professional piece in it. That's about midway through that presentation as a nice pie chart that breaks it down for you. Anything you want to add in terms of...

No, that's right. Just look at the pie chart and you'll see the data.

I think the thing that I'd like to point out from that is its diverse range of kind of verticals that we're in, with technology being a large one, which gives us that opportunity into that [ Cir Prep ] business that you saw in that video.

And what I would add is obviously we talked about PDRI so we're going to see the fetal market increase as well in terms of going into next year.

And contract renewals?

Yes. Thank you. So as you saw from the presentation, the U.S. School Assessment business is up 8% this year. And I think that reflects the relentless focus that we have right now on providing our customers with the best service that we can. We know that K-12 education is really a priority for governments at state and around the world right now. So we have an absolutely relentless focus on delivering value for our customers and driving -- helping them to drive those improvements in educational outcomes. So in any 1 year, there will be contracts up for renewal. They cover multiyear periods, but that focus that we have on doing absolutely the best job that we can to deliver high-quality and support our customers in delivering what they need is what's going to be our key to success.

Yes. Thank you, Sharon. I think the theme and you heard it in the presentation, it's not just the breadth of offering, but the stability of those relationships, the high renewal rates of contracts, whether it's in school, in VUE and clinical, gives -- this is a really high-quality set of businesses. Really, really high-quality cash generation and very high visibility going forward. So an extremely good management team. I think I'm contractually obliged to say that. And the other thing that's worth noting that's implied in the presentation, of course, in those sectors, to your first question, Sami, is, of course, the very sectors that we deal with at scale -- I think healthcare, I think IT and technology, I think professional services, finance, accounting, for example -- many of those specifications, you need as an individual to get recertified. So this is -- many of these instances are not won and done in terms of if you've got a certification in 2020 in a certain cloud certification for a certain provider and they then update their product, their technology, there is a need for you to go back and recertify. So there's this notion of not only are we capturing a lot of people at scale on an annualized basis, the requirement for those individuals to come back and recertify. And that's where, particularly the Credly business is the world's largest certification wallet. In some regards, plays a significant part, and you see that increasing going forward.

Questions, Jo?

Yes. Next question is from Nick Dempsey from Barclays. That's three part, but I think we've answered the U.S. Student Assessment mix, so I'm going to go for the other two. Is e-proctoring an opportunity or a threat for Pearson VUE if e-proctored tests become the norm? Does that not mean that your network of testing centers is less competitive as an advantage? And then the next question is, is the Edexcel business in the U.K. likely to see growth much better than flattish going forward? That was roughly the historical growth, I believe.

Gary?

Okay. Should I take the proctoring or online proctoring question? Thanks for the question, Nick. I mean, it's a really interesting question. And as I highlighted in our -- in my part of the presentation, we take a multimodal approach to exam delivery. And we meet customers where they are. I mean one thing to look at -- I mean, obviously, online proctoring really accelerated during COVID, obviously. And we were actually at an online proctoring solution before COVID. And that ramped up to 3 million exams. I did say we do 19 million. Actually, what we're seeing now is that sort of peaked and it's coming down slightly. And there's reasons for that is because some customers -- you think some customers are taking these exams, some of them are 6 hours. Do you want to sit at home for 6 hours to take an online proctored exam? You could be disturbed. People have spent months and years getting ready to take these exams. So actually, what we're seeing in the market is actually that people are moving back to test centers. Online proctoring isn't going away. And our job at Pearson VUE is making sure that we provide the optionality for our customers to deliver a fair, reliable testing experience that is secure, and we work with our customers and make sure that's right. So we're actually leading the way to make sure we meet the customers where they are. So the answer is online proctoring is here to say. But actually, people want choice, and we're seeing when we're providing that choice.

Sharon?

Yes. Thank you. I mentioned in the presentation, we've delivered 8% growth this year in the School Qualifications business. So in answer to the question, we are delivering growth, and we're working hard to do that through product innovation going forward. And I suppose as we go into the next 3 years, I indicated, as I spoke, that changes in government policy are a huge stimulus to the market, and we will no doubt see some changes over the next few years. So I'm very optimistic about the next few years for that business, but we're delivering growth right now.

Thanks, Sharon. And next two questions are from Daniel Kerven from JPMorgan. First question, what are the longer-term risks and opportunities from AI and automated marketing for summative and informative assessments? Second question, is proctoring online testing an alternative to physical testing centers? And is it an advantage for not just for VUE, but also for Pearson Test of English?

I think Gary sort of answered -- the second piece as it relates to online versus physical. I mean, these are life-changing in many, many instances. They are literally life changing. If you think about the Pearson Test of English, you are going to take that test as part of emigration to Australia, for example, where you're going to get a job. How you do in the Pearson Test of English affects not just you, but your entire family. So we take that responsibility incredibly seriously. And the ability to do that, whether you're a student going to study or literally, you're going to take your family and immigrate to Australia and start a new life, not just a new career, but a new life. These are very high stakes, and the need for security, the need for -- as was referenced whether you're taking the test in New York or you're taking the test in Manila, I think was the example or in Bangalore, you get consistency. That's super, super important. So just one bit on that. But in terms of generative AI, whatever it is...

Well, Andy, your remarks about the responsibility that we bear in delivering this critical service to people ties very nicely to AI. We have leading capabilities in AI that are in the market today. We do lots of scoring of different types of exams. Sharon, in particular, talked about that during her remarks. We also have AI capabilities in our proctoring solutions that can aid the human proctor in detecting activities that require further investigation. In terms of generative AI, we can all imagine what the possibilities could be. And our R&D activities are working very, very hard at things like content generation, which is clearly a huge part of what we do as an assessment company. But it's worth pointing out that we are proceeding very cautiously with this in terms of going into market. And that's what our customers want because of the high stakes of the types of things that we do. The precision and care around what goes out to the field is paramount to absolutely see generative AI as a tool that will bring us efficiencies over time. But we are not in a race to push things out in front of test takers right now with generative AI. If anything, I'd say it's the opposite.

Yes. It's very well put. There is the AI of it, and we've been doing AI for over 2 decades across the businesses and across all of these three businesses. So AI heavily embedded with -- across the company, heavily utilized. The generative AI, you've heard us talk about last week what we're doing in terms of higher education. And to Art's point, we've just got to be very careful as it relates to this specific business because it has to be 100% correct, 100% of the times. So we're doing a lot of interesting, as Art said, research into it, aside from the efficiencies from content creation and the like. And then the -- I'd only add, which I referenced at our Q3 call last week. Data and the value and the quality of the data sets and the IP that underpins those data sets is only going to increase. And as a company, we have incredibly rich data across the company. You see and you can imagine some of the examples of the data and insights that we have within the business is before you now. We talk about the data and insights we're getting in our Higher Education business. Our Workforce Solutions business. Those value -- the value of that data, it's more than just words people think about, so it's just textbooks or scraping the Internet for -- for words. The value of the data that we are generating internally is only going to increase as the applications to utilize that data with generative AI increases, and we're doing some interesting R&D to put that as it relates to that space. There's a question -- a follow-up question at the back of the room.

Yes. Another follow-up. So on the topic of generative AI and what you're doing in R&D, can you just talk a little bit about kind of this like strategy that you're approaching those activities with? Are you looking to partner with larger players and utilize third-party large language models? Are you looking to actually build out internally those capabilities and do kind of more education-focused, small language models? Just kind of curious on the investment front, how you're approaching that?

We are -- we have been -- I've remarked last week, we've been approached by everyone you could imagine to license our data. And some that you wouldn't imagine have also approached us, which sort of validates the hypothesis around the quality of the data. One of the things around our data is actually is complexity. I referenced scraping of words. If you think of the LLMs are really scraping a thin layer of information from the Internet and beyond. What makes a lot of our content, a lot of our IP, whether it's in clinical, in many of our assessments, certainly within sort of our Higher Ed courseware is actually complexity. It's the depth of the data. This is not just -- with the greatest respect to other -- it's not just words strung together. There is an architecture. There is a structure around how that data is utilized, and that drives proven results. Whether that is Campbell's Biology, as I often refer to, there is something inherent in the structure of how that courseware is constructed -- or [ Troy's ] chemistry, another example through to many other parts of the business. That's what we see a lot of value in. That's actually quite hard to replicate. And so then we're doing some interesting things where if you just take all of our small data sets and put them kind of within a sandbox. And then you put that sandbox on top of other LLMs, we can then measure the -- one thing when we do that, the quality of the output is far, far higher, obviously, because richness of data in and purity of the data we're in, we're only putting our own data in. It leads to increased purity of data out the other side. And we're doing some very, very interesting research across the company into that. We've had very encouraging responses and engagement. We put generative AI study tools into Pearson+ this semester and into three MLM titles, and we're getting a lot of really useful feedback, Tom, Tony and the team. So as I've said from day 1, generative AI for Pearson is a significant net positive over the long run. But what we want to do is be very thoughtful. We see many people come up with a headline around gen AI this, gen AI that. When you scrape the surface, it's not really -- there's no data there. And so what we want to do is trust and quality across all of our businesses, particularly in the businesses that you've seen highlighted today is so important, it's what sets Pearson apart. One of the reasons that sets Pearson apart from its peers in the different businesses that we operate in is you trust us. And because you trust us because we deliver high quality. So we're not going to go and just run after the headline. We have the confidence, we know we have the confidence of our IP as an asset. We have confidence in the quality and the value and the increasing value of our data as it relates to a technology that whilst generative AI is several years old, it only really came to public consciousness 12 months ago. So we've been -- we are investing a lot of money, a lot of time, a lot of effort understanding what is possible and also what is not possible. But the net of this across all of our businesses is only going to be positive.

Thank you. Jo?

Thanks, Andy. So Sally, this is definitely a question for you, it's on cash. Please, could you elaborate more on how we get from 6% free cash flow conversion to 90% conversion for cash? And how should we think about free cash flow next year in terms of growth and thereafter?

Thanks, Jo. Who's that from?

[ Sean Dodson ] from Goldman Sachs.

So in terms of free cash flow, you'll have seen improvement over recent years. The 90% that I refer to is in operating cash. So if you look at our profit, what drops through to operating cash. And then the three factors underneath that as you get to free cash flow are restructuring costs that we've had historically are tax and interest. And one of the things that is going to be a part of Pearson from a go-forward point of view is that restructuring cost drops out. And therefore, you'll see that conversion raise when we look at free cash flow. So a really strong free cash flow conversion outlook.

Thanks, Sally. And next question comes from Tom at Citigroup. How do you go about adding more tests when you own the entire value chain a la Pearson Test of English? And does this bring you into conflict with your customers?

Gary?

Thanks for the question, Tom. Interesting. I mean, obviously, in terms of -- we've talked about we have 550 different clients in different sectors. And there is this thing about obviously, for some of the -- some of the tests, particularly in the medical space, that's not really a space where we do prep materials or what have you, but we see the opportunity really in the technology space. And the reason -- twofold. One is, obviously, we do a lot of certifications in the technology space. But also, we have relationships with those players in terms of have those certifications that want to support. And at the end of the day, the technology plays want people to be certified in their products and their services because that grows them. So it's a symbiotic relationship. The other thing that's important is that from what we're doing is that I think those opportunities, because technology changes quite rapidly, it means there's always a need for re-skilling and practicing and really quality products to give people the confidence to take an exam. If you think about what Pearson VUE do is offer a service, which no one really wants. No one wants to take an exam, but they want the outcome of the exam. So what we're trying to do is make that really helpful for the test taker to have the best possible testing experience. But just to reiterate, some of the markets we have to separate preparation from actually delivering the test, but we think technology is a way to go.

Anything to add, Art? You're all good? Yes. I just -- Tom, I'd also just add, the size as it relates to PTE. At any one time, it's about 1.5 billion people in the world learning English. It is the global language of business. And so if you think about the overall share relative to that scale, see opportunity, particularly in enterprise, and we are seeing that in our Workforce Solutions where many global companies are hiring individuals where English is their second language. So the need for a proof of English language proficiency and the ability to get those individuals, those employees up to a level of English language proficiency increases productivity for the companies and for the enterprises. So we're doing a fair amount of work there, looking at introducing a mid stakes Pearson Test of English, as we've mentioned prior, which will help address some of that market. So a lot of growth within the PTE piece, Tom, but as you heard from Gary, it's against that breadth of the number of certifications and -- and we're going to start, as Gary referenced, in the IT and tech space, where we can start to move up that value chain. We actually within -- this is where you think about how you redefine what higher education is, because in within Tom's world, within higher education, we already are producing many technology textbooks and products that are used in order to study for the test. So if we can start to bring those together and move up the value chain with great and greater sort of ARPU of each of the individuals coming to take a certification, really interesting part of the business and the ability for us to expand in that area.

Thanks, Andy. Two more questions from Ben from Deutsche Bank. The long-term growth of you has been impressive. Out to 2025, how should we think about the breakdown of growth between the existing testing business and adjacent markets? And secondly, given long-term contracts and high retention rates, assessment seems quite a defensive business. Are there other characteristics you would highlight to reflect the resiliency of this business?

Sure. Go for it, Gary.

Yes. Thanks for the question, Ben. I mean, as I explained, in terms of growth for Pearson VUE, there's three key areas. Obviously, we want to maintain and grow our current customer base, support the divisional cross-divisional initiatives from PTE and help that scale. The federal market in terms of growing in the federal market and obviously moving up the value chain. We've really got -- we think there's some real positive momentum there, as I've talked about, and we think the future looks fairly bright.

Nice to have you with us today, Ben, and you're absolutely right about the defensive nature of the large contract portfolio that we have. And there's a couple of things that we think about as we're kind of assessing what the future of that business looks like. We love the visibilities that the contract gives us to the revenue. But beyond that, it also gives us direct visibility to what government agencies are thinking in terms of regulation and policy change. It gives us visibility to what large technology partners who we service today are putting out into market in terms of innovating their own products and needing certification to go along with it. So it's not just the pure financials of those contracts that gives us an advantage in the business. It really does serve as an excellent platform for driving future ongoing advancements in the services that we offer. The other thing that this breadth of contracts gives us is that breadth not only across all the different professions that we have in VUE, but across all different stages of learning. And this further protects us from swings in any one area at any one time. It's so broad and there are so many different components of where we're participating in learning that it's an overall excellent base to give us that high confidence in the revenue numbers that we're delivering.

Thank you, Art. Actually, Art, the next question is for you as it relates on clinical. It comes from Nick again at Barclays. Clinical Assessment saw a modest decline in terms of organic revenue growth in each of '16, '17, 2018 and 2019. However, recently, that has improved. Does the improvement relate to inflation? Or is there a structural shift or change in the market?

There have absolutely been changes both in the market, as well as in our own execution abilities in that market. So I think I referenced in my remarks earlier, that acceptance and demand for the types of products and services that our Clinical business supports is quite high right now. People recognize the value of these services. They want these services. And in many instances, there's funding support from government agencies to help get those products into the hands of the clinicians that can help folks who have that need. We've also sharpened our execution quite a bit over the last few years. We have -- excuse me -- we have enhanced our customer service and our e-commerce capabilities to really capture that market well. We talked a little bit about our digital portfolio, and that has really not only captured the attention of our large school districts, but it also delivered tremendous predictability due to the exceptionally high retention rates that we have in there. So it is a combination of, yes, the market has shifted in a way that is in support of these products, but we have also executed extremely well in those areas and taken advantage of it, which is what puts us in that very strong position in the market today.

And with that, Andy, I'll hand back to you.

Well, thank you all for your questions and your interest. I hope you all agree with me. I remember way back in the virtual times of March 2021, when I first did a presentation as CEO, and I did reference the Assessment and Qualifications, I thought then, I referred to them as the crown jewel of the company. I still strongly believe that. I believe that they provide the core asset base from which around certification and assessment around which this company can drive even further growth and it impacts other parts of the company. We've referenced English Language Learning. You heard a reference to Higher Ed. Obviously, Workforce is another area that is also into links, as it were with this team. I would also -- hopefully, you've all got a sense of the quality of the management of these businesses. And they are very, very complex businesses. And they are extremely, extremely well managed, not just by the representatives up here, but they would be the first to say the many thousands of employees who help make these businesses so successful and deliver a high-quality, consistent product again and again and again. In fact, every 1.6 seconds, someone somewhere in the world is getting certification from Pearson. That's incredible consistency, and makes me incredibly proud. And I hope you've all gained greater insight into this part of Pearson's business. And thank you for your time and for those of you online, thank you for joining, and have a good afternoon and the rest of you. Have a good morning.