Monday, March 03, 2008

Pearson Post Record Results

Pearson shares fell this morning despite posting financial gains across the board. The company increased top line revenues by 6% to £4.2bn and adjusted operating profit by 14% to a record £634m. The profit increase was supported by all segments of the Pearson group with Pearson Education up 9%, Penguin up 20% and the FT Group up 30%. Press release.

Investors are concerned that Pearson's results are weighted to reliance on the US market both in education and advertising revenues and as a result the company's share price fell despite the results. Pearson is generally conservative about forecasting their full year revenues and profits and underplay the impact of their acquisitions. If past year's performance is any indication the underlying businesses will continue to drive growth in excess of competition and the recently acquired companies/operations will further support growth. This is particularly the case in Education where the company has spent heavily in recent years. Additionally, across the company, management continues to transform revenues from annual one-off sales to subscription (i.e. recurring) based models. This supports annual revenue, profit and cash generation growth.

Typically (in recent years), the company sets aside £500m for acquisitions which enables them to acquire without dilution. With markets depressed it will be interesting to see how they are able to stretch this number during 2008.

Other highlights:
  • The company spent £472m for 2007 acquisitions which added £90m of sales and £13m of operating profit to 2007 results
  • The Government Solutions business was sold to Veritas Capital for $560m in cash, $40m in preferred stock and a 10% interest in the company
  • The newspaper Les Echos was sold to LVMH for €240m in cash
  • A 50% stake in FT Deutschland to Gruner + Jahr was sold (no terms noted)
  • The Data Management (Scanners) business to M & F Worldwide Corp for $225m in early 2008

Their outlook for 2008.

  • Penguin (20% of sales; 12% of operating profit) expects to improve margins further and into double digits. Penguin's good publishing and trading performance has continued into the early part of 2008.
  • Higher Ed will continue to build on operating efficiencies and beneficial recent acquisitions. As in recent years they expect to grow 1-2% better than the industry
  • In School the company expects the integration of Harcourt to progressively build margin improvement with material benefit to show in 2009
  • At the FT, the company expects to continue to broaden their revenue base and continue to reduce the reliance of advertising revenues. Ad revenue is 30% of group revenues versus 52% in 2000.

Marjorie Scardino, chief executive, said: "This is another record set of results and an excellent performance from every part of Pearson. We continue to reshape Pearson into a more digital, more international and more efficient company, and those changes make us confident that 2008 will be another good year."

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