Pearson's Turnaround Hits Turbulence on Tough U.S. Market

(Bloomberg) -- John Fallon’s attempted turnaround at embattled Pearson Plc suffered a wobble, as the world’s largest education company predicted continuing difficulties in its biggest market and forecast lower earnings for 2018.

Revenue from Pearson’s U.S. higher-education courseware business will be unchanged or fall at a mid-single digit percentage rate at the most in 2018, the London-based company said Wednesday in a statement. Sales in that division were down 3 percent on an underlying basis in 2017, continuing trends seen over the first nine months and following “cautious” buying behavior, Pearson said.

Pearson's Turnaround Hits Turbulence on Tough U.S. Market

The ongoing challenges in the U.S. are a hurdle for Chief Executive Officer Fallon, who faces a crucial year as he seeks to revive the company’s fortunes. Having overseen several profit warnings and fired 10,000 staff, about a quarter of the workforce, since taking the helm in 2013, investors want to see his focus on digital education bear fruit.

Shares of Pearson fell as much as 6.7 percent for the biggest drop since July and were down 5 percent at 682.60 pence as of 11:03 a.m. in London.

Pearson has been hit by steep challenges in North America, where lower college enrollments, the rise of free online resources, and students opting to rent instead of buy textbooks have all weighed on sales. About 45 percent of Pearson’s profit comes from its U.S. higher-education business, analysts at Liberum estimate.

Pearson said profits for 2017 were about 600 million pounds, coming in at the higher end of their guidance and achieved by a tight focus on costs. U.S. higher education digital courseware revenues grew by approximately 9 percent and net debt was reduced to 500 million pounds, helped by proceeds from disposals and good cash generation, Pearson said.

“There’s a lot of hard work to do, but people feel excited and energized by the digital transformation of the company,” Fallon said on a call with reporters. “We’re in good shape to do well over the next few years.”

Adjusted operating profit will be 520 million pounds ($716 million) to 560 million pounds in 2018, down from about 570 million pounds last year, Pearson said. Taking disposals and exchange rates into account, 2017 earnings would have been about 500 million pounds, meaning Pearson’s forecast actually represents growth, the company said.

“The fact that profits are likely to decline in 2018 is probably a negative surprise for some investors,” said Alex DeGroote, a media analyst at Cenkos Securities. “If this is a turnaround story, why are profits declining?”

Given the difficulties in one of its biggest divisions, Pearson has been cutting costs, slashing 3,000 jobs last year and promising to cut annual expenses by 300 million pounds by 2019. Pearson sold the Financial Times and a stake in the Economist in 2015, plus part of publisher Penguin Random House last year, as Fallon has sharpened the company’s focus on the education business.

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