Pearson plc

Hello, good morning and many thanks for joining us both live here in person and online for our 2023 Interims presentation. The video you've just seen highlights some of our amazing talent and innovative products that have helped drive the company to deliver excellent H1 results. with 6% revenue growth and 44% profit growth to £250 million, the highest we've seen for at least the last 10 years. Importantly, we've also improved margins, reflecting the benefits from our cost efficiency programme as we deliver on the commitment we made 12 months ago. This progress means we're confident in our group guidance for both full year 23 and the medium term. The products you saw in the video are all part of this growth story. The Pearson Test of English helped our English language division grow 44%. Fathom contributed to workforce skills revenue growth of 9%. Assessment and qualifications led by Pearson VUE grew 7%. And improvements in our higher education products grew adoption retention rates this year. And Pearson Plus delivered 938,000 paid subscriptions, a three-fold increase over last year, with registered users growing to 4.7 million. This growth was supported by our proprietary IP, vast data sets and AI. But more on that later. To touch on some of the highlights in the first half. The demand for English language learning and for the Pearson Test of English remains strong. As you know, we've recently received both migration and study recognition for PTE in Canada, which will ramp up at the end of this year and into 2024. We also continue to gain market share with PTE in India. Furthermore, the team are working hard on the development of a number of initiatives, including Mondly Works, which focuses on English language proficiency for the workplace. In Connections Academy, we're launching a new career pathways program for middle and high school students. This allows students to earn vocational certification and a college credit while they're still in high school. These initiatives will improve the competitive positioning of our virtual schools offering, driving future growth, and also increasing the interconnectivity with Credly and Pearson VUE. Within assessment and qualifications, our Pearson VUE business has shown good growth. with particular strength in both the critical nursing and technology sectors. We've now completed the PDRI acquisition and have started delivering TSA exams where Pearson VUE partners directly with PDRI. In clinical assessments, we've launched the next generation digital platform. We continue to make progress in our offering of on-screen exams within our UK and international qualifications business, and this includes the rollout of GCSE computer science and international GCSEs in English language and literature. Turning to higher ed, I couldn't be more pleased with the progress that we have made over the last six months. We're starting to see results from the investment and focus on improved product and the implementation of new sales teams and processes. We're making good headway with our LMS integrations and the transition to cloud of our MyLab and mastering platforms, which enable us to deliver upgraded, best-in-class features to improve our customer experience. We're also seeing good uptake in our iLab products, where more than 1,900 virtual labs were assigned across more than 600 courses through mastering biology alone in the spring semester. And myLabs IT is driving strong takeaway adoptions for fall with the launch of nine Microsoft Office titles on the platform. Within Workforce Skills, we continue to make good progress with vocational qualifications, including winning the new contract with the Jordanian Ministry of Education to deliver BTECs and winning three new T-level contracts here in the United Kingdom. As I've previously mentioned, Workforce Solutions should be seen as a startup within the broader Pearson landscape. The strength of our portfolio has enabled us to attract new business with enterprise customers growing 12% year over year to a total of over 1,500. As we outlined at prelims, we've built a powerful technology stack that in particular has broken down the core capabilities of Fathom into modular APIs, enabling its use across workforce skills products and beyond into other Pearson products. For example, we're bringing the global scale of English into the Fathom Skills Ontology with a view of mapping English language proficiency requirements to career pathways. We've also added new capabilities, such as modularizing our Talent Lens role assessment application so that it can be personalized to the specific roles or businesses. We spent the last six months testing an MVP of the talent investment platform with large customers. And their feedback indicates that they actually prefer the modular personalized approach versus a one size fits all. And therefore, we've decided to focus our efforts on delivering this way versus on a fully integrated platform. By being agile, flexible and meeting customer specific requirements, we'll be able to take advantage of the unique market opportunity in workforce solutions. And while this decision makes the workforce skills targets more stretching in the shorter term, we remain confident in the market opportunities. Now, I'd like to hand over to Sally, who can give you more details about the company's first half performance, and I'll be back to share further insights and exciting developments, particularly in the generative AI space. Sally?

Thanks, Andy. And hi, everyone. We've delivered another strong performance in the first half, with revenue excluding OPM up 6% and adjusted operating profit growing 44% to £250 million. Assessments and qualifications and English language learning have had a particularly good half, with virtual learning, higher ed and workforce all in line with what we expected. Profit and cash at the half-year point have grown significantly, underlining the achievement of our cost efficiency programme. All of this means we are confident of meeting expectations for the Group for the full year and the medium-term guidance we gave in March. We're also pleased to have closed the disposal of the Poles business at the end of June. Earnings per share increased by 3.1p or 14% to 25.6p due to that profit growth with tax and interest returning to more normalised levels as well as lower issued shares because of last year's share buyback. Our balance sheet remains strong, enabling continued investment in the business as well as increased shareholder returns, with the £300 million share buyback commencing in the third quarter and an increase to our interim dividend by 6% to 7p. Looking at revenue by division, assessments and qualifications revenue grew 7%, driven by an excellent performance in Pearson VUE, particularly in the IT and healthcare segments. Following the disposal of the POLS element of OPM, our virtual learning underlying growth is reported excluding this part of the business. The virtual learning revenue decrease of 15% is driven by the ASU contract element of that business, which will continue to impact growth in the second half of the year. Virtual schools were supported by good retention rates, offset by lower enrolments and lower district partnership renewals. English language learning revenue grew 44%, with an outstanding performance in Pearson Test of English. And workforce skills revenue grew 9%, with good growth in both vocational qualifications and workforce solutions. And higher ed revenue was down 2%, reflecting a continuation of the trends observed in the fall semester of the 22-23 academic year, with a decline in enrolments and a loss of adoptions to non-mainstream publishers. Orbit, the latter, improved slightly. Turning to profit. Group-adjusted operating profit grew 44% to £250 million, driven by operating leverage on revenue growth and the cost-sufficiency programme partially offset by inflation. Half-year profit margin grew from 9% to 13%. At a divisional level, the same group things I've described are apparent in each division, in addition to increased investment in workforce and English, alongside some negative phasing in higher education relating to amortisation and positive phasing in virtual learning relating to contract closures. It's worth remembering that the seasonal nature of the English and HE businesses mean that their margins are routinely lower in the first half compared to the full year. Operating cash flow of £79 million was driven by increased trading profit as well as strong collections and portfolio changes. Our balance sheet remains robust. with net debt at the end of June of £900 million. That increase from £800 million last year is largely due to dividends, tax and the 2022 share buyback more than offsetting strong operating cash flows. In short, our operating and free cash flow performance is stronger than ever. We've continued to invest in the business in H1, both organically and inorganically. Internally, we have continued to shift resource, cost and capital between areas of the business. You'll soon hear about the innovations we have developed in the AI space. All of these have been achieved within the existing spend plan. We've also made strong progress on reshaping the portfolio. We completed the acquisition of PDRI in March, significantly expanding Pearson's services to the US federal government and in the recruitment assessment space, whilst also adding to profits. The disposal of our polls business is also now complete, further focusing Pearson's portfolio towards future growth opportunities. The board has continued to demonstrate its commitment to a progressive and sustainable dividend with a 6% increase in the interim dividend to 7p. And whilst we also remain committed to maintaining a strong balance sheet, given our strong operating cash flows, we can do that, invest in what we need, but also commence our previously announced £300 million share buyback. Moving to the outlet for 2023, we are confident of meeting group expectations with low to mid single digit revenue growth, excluding OPM and strategic review, and group profit margin growing from 12% at the full year last year to mid-teens, benefiting from the achievement of our cost efficiency programme. Importantly, as we've proactively reshaped the group, we are now generating some 45% of the consensus full-year profit expectations in the first half of the year. This represents a fundamental shift from where the business was even last year. We're also reiterating our guidance of mid single-digit group revenue growth over the 22 to 25 period and for margins to rise to the upper end of mid-teens in 2025. In terms of divisional guidance and phasing, there are a few points I should highlight. We are raising our revenue growth expectations for 2023 in English language learning from high single digit to around 20%, following strong growth in the first half, which we expect to normalise in H2. We're investing a portion of that operating leverage on this improvement to support future growth opportunities. In workforce skills, given the considered approach that we are taking to ensure we have the right go-to-market strategies to scale that revenue in workforce solutions, our 2023 and 22 to 25 growth guidance is likely to be more stretching. Continued growth in Pearson Plus subscriptions will lead to a shift in higher education revenue recognition from Q3 to Q4. Contract timing in ANQ will see delivery in earlier quarters, meaning Q4 revenue growth will be lower than average. We're confident in achieving full year guidance. And it's also worth flagging that the termination of the ASU contract will continue to impact growth in the second half of the year for virtual learning. In virtual schools, our expectations for revenue growth remain unchanged, with H2 enrolments impacted by the loss of that large school contract we've previously discussed. I appreciate there are many moving parts given the recent portfolio changes we have, but to put things simply, there'll be no revenues or profits relating to OPM, being ASU plus polls, or the strategic review businesses from the beginning of 2024. So in summary, we've had a really strong first half performance in all financial metrics and are confident of delivering on full year expectations.

And with that, I'll hand back to Andy. Thanks a lot, Sally. Now, I'd like to take a deeper dive into our AI capabilities and highlight some of the things that we're working on. We're still very early into the generative AI journey with new developments happening on an almost daily basis. So it would be wrong to claim victory so early in the game. And we're also very aware of potential risks and turbulence ahead. But to be clear, we see generative AI as being a real long-term positive to the company and not just in higher education, but across our portfolio of businesses for the following reasons. We believe the value of our proprietary IP and datasets will increase over time. We have deep AI experience and expertise across the whole company. We're starting to introduce new AI enabled proprietary IP and datasets will increase over time. We have deep AI experience and expertise across the whole company. We're starting to introduce new AI-enabled products across the business. And we've already achieved... ...but have yet to commit to. What this interest does demonstrate is the real value to be had of owning your own intellectual property. We're also continuing to monitor legal and legislative developments very closely. Now, one of the biggest areas of focus for the team has been around the positive implications of embedding generative AI into our higher education courseware. We've been working with that with one goal in mind, namely how to improve the learning experience for both faculty and students. As I mentioned in our recent update, one of our key advantages is the quality of the data sets we're able to use in generative AI due to the ownership of our IP. Simply put, the purity of any data input equates to greater accuracy of any data output. As you'll shortly see, we've been working on ways to embed generative AI within the learning experience. We think it's very important to utilize this technology in a frictionless and seamless way to benefit and enhance how students learn. Core to everything that we do is maintaining trust and quality, and generative AI is no exception to that rule. We're not interested in utilizing this technology merely to provide students with a shortcut to an answer. When we tested different LLMs with a question from Campbell's Biology, they often didn't get it correct. So we believe delivering product that is reliable, accurate, and trustworthy is paramount. Now, here to give you a quick insight into just some of the product innovation we're launching for Back to School, I'd like to hand over to our new Chief Product Officer, Tony Prentice.