The Analyst: Pearsona non grata after third quarter update
Ian Whittaker has been a City analyst for more than two decades, and what he doesn’t know about media, advertising and the creative services industry isn’t worth knowing. Here’s the next instalment of his monthly column for Morning Wire
Pearson’s shares fell nearly 15 per cent after its third quarter trading update.
While the headline figure of 10 per cent underlying revenue growth for the first nine months of 2021 sounds impressive, it fell short of analyst expectations. It’s a bump in the road for Pearson’s relatively new CEO, Andy Bird but also left the shares nearly 50% lower than they were 10 years ago. For long-standing Pearson shareholders, it was one in a long line of painful moments.
As a point of disclosure, I was a long-time bear of Pearson back in the 2010s and my main concern then is what brought the shares down last week: namely the performance of its US Higher Education Courseware business, which saw revenues fall over 20% year on year in what is the most important quarter for selling materials. This dashed the hopes of many who believed that Pearson was past the worst in that business.
Pearson obviously has not been helped by the pandemic and it referenced that US Higher Education enrolment trends had been impacted, particularly at Community Colleges which cater more to lower income students, as the employment market has tightened. However, there have been other issues as well. Pearson’s traditional number one position in the US has come under pressure as number two player Cengage launched Cengage Unlimited, which is an “all you can eat” offer aimed at students. Pearson was slow off the mark with an alternative offering and Cengage’s performance in US Higher Education sales has been noticeably better than Pearson’s.
This leads onto Pearson+, its Direct to Consumer (D2C) offering. Pearson+’s name is no coincidence given Andy Bird was a Disney executive and the company is hoping it can be as successful as Disney+ in delivering users. Pearson+ offers access to over 1,500 eTextbooks for as little as $9.99 per month and, while its immediate focus is the US Higher Education market, Bird’s comments make it clear this is just the first step at turning Pearson+ into a must have educational and workforce app that consumers will use throughout their educational and working lives.
However, investors didn’t like what they perceived to be a slow start for Pearson+. While it has over 100,000 paying subscribers, many of these seem to have come from its other products, and the 2m registration number didn’t seem to impress either with investors fearing this would not translate into paying subs.
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I think this view is harsh (for those who knew me as an analyst, please pick your jaws off the floor). If Pearson gets this right – and it is a big “if” – Pearson+ not only has the ability to transform Pearson’s US Higher Education position but also to open up a much larger Total Addressable Market when it comes to the lifetime working journey of the consumer. In effect, the lifetime value per customer would be significantly increased. This is also an inherently scaleable product, which bodes well for margins.
If I have one criticism of Pearson’s approach with Pearson+ is that it feels like it is still trying to fight on the old battle ground of US Higher Education Courseware. This is understandable. The business has historically been high margin and highly cash generative and, even with all the declines of recent years, it is still nearly 25% of the group’s revenues. If Pearson can reverse the declines in this area, it will have a meaningful impact on the group’s financial numbers.
Yet it feels like in doing so the group is missing out on what could be a much bigger opportunity, which is the changes happening in the world of work. It seems apparent that the pandemic has not only accelerated existing trends but also created new ones. Over 4 million Americans quit the jobs market in August, the fifth month in a row for records of exits, and both individuals and employers seem to be struggling with what the world of work looks like in the future. Pearson, which also has sizeable businesses in workforce training, testing and professional services, should be able to capitalise on these trends.
Much remains still to be done at Pearson. It is still a complex business, despite numerous disposals and there is a strong case for arguing it should slim down further (which, to its credit, it is doing). Mr Bird also has the advantage of a stable, long-term focused shareholder base that is generally supportive although Swedish activist fund Cevian has been pressing for change. However, for many, Friday’s trading statement was an unwelcome reminder of Pearson’s share price travails over recent years. I suspect many shareholders will want to give Andy Bird the benefit of the doubt and, as mentioned, Pearson+ has the opportunity to be a game changer. However, patience is unlikely to be unlimited.