Pearson Shares Dive on Profit Warning -- 3rd Update
January 18 2017 - 8:27AM
Dow Jones News
By Simon Zekaria
LONDON--Shares in Pearson PLC plunged more than 30% on Wednesday
after the world's largest education company issued a profit warning
for 2018, warned of lower future dividends and said it plans to
sell its stake in its Penguin Random House publishing joint
venture.
Pearson blamed further declines in North American sales of
higher-education course materials for the warning but said it still
expects its 2016 operating profit to be in line with its previous
guidance.
Rapid growth in employment and increasing education regulation
has reduced higher-education enrollments in the U.S., which has put
pressure on Pearson's business even as it has sought new sources of
growth in emerging economies such as Brazil and China. Pearson is
also grappling with a difficult transition to digital formats from
print for many of its higher-education products.
The company said revenue was down 30% in the final three months
of the year, resulting in an 18% full-year decline that it called
unprecedented. Shares were down as much as 30.4% in London trading
earlier Wednesday and lately were down 29% to GBP5.74 ($7.11).
"There is no getting around how tough it is," Chief Executive
John Fallon said of the education sector in a call with reporters.
He admitted the company got "big calls" wrong on U.S. college
enrollments and revenue forecasting.
Pearson said it plans to sell its 47% stake in U.S.-based
Penguin Random House--one of the world's largest book
publishers--to bolster its finances and invest in other parts of
its business. Its joint-venture partner, German media company
Bertelsmann SE, said it was open to raising its stake in the
publishing house "provided the financial terms are fair." The
publishing house was formed in 2013 when the two companies combined
their book-publishing businesses.
Three months ago, Pearson said Penguin Random House was
performing better, partly from movie-tie-in sales for books such as
"The Girl on the Train" by Paula Hawkins in addition to
best-selling new work by authors Colson Whitehead and John Le
Carré.
"The ball is very much in Bertelsmann's court," Pearson Chief
Financial Officer Coram Williams told reporters. In the absence of
a deal, Pearson would seek to recapitalize the stake and extract a
dividend, he said.
Pearson's share price has almost halved in the past three years
and the company has laid off thousands of employees amid sales
pressures in key markets. It has sold several assets during the
period, including the Financial Times newspaper and its 50%
noncontrolling stake in the publisher of the Economist magazine, to
fund its growth across global education, raising billions of
dollars.
While higher education in North America remains Pearson's
biggest problem, the company also has faced setbacks in its efforts
to capitalize on the Common Core primary- and secondary-education
standards that have faced a backlash in several U.S. states.
"This is a tough time for the company," Mr. Fallon said on
Wednesday. "We have to move decisively and urgently."
Pearson said its 2016 revenue fell 8% on an adjusted basis. It
expects to report an adjusted operating profit, before
restructuring costs, of GBP630 million, which is in line with
previous forecasts after GBP55 million in savings on staff
compensation.
For 2017, it sees operating profit on the same basis of GBP570
million to GBP630 million, with adjusted earnings per share of 48.5
pence to 55.5 pence. Pearson also scrapped its 2018 earnings
guidance.
The company sees its 2016 dividend at 52 pence, in line with its
guidance. However, it said that from 2017 it intends to "rebase"
its dividend to reflect portfolio changes, increased investment and
earnings guidance.
"Management are still clinging to the mantra of a longer-term
stable business, but with visibility so low on their key profit
driver [of] U.S. higher education and given the increasing signs of
structural pressure, we do not see how management can have
confidence they can turn things around," Liberum analyst Ian
Whittaker said.
News Corp, which owns Dow Jones & Co., publisher of The Wall
Street Journal, competes with Pearson's book publishing
operations.
Ian Walker in London and Ulrike Dauer in Frankfurt contributed
to this article.
Write to Simon Zekaria at simon.zekaria@wsj.com
(END) Dow Jones Newswires
January 18, 2017 08:12 ET (13:12 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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