Pearson plc

Good morning everyone and welcome to Pearson's 2023 nine-month trading update. Today we'll host a presentation followed by a Q&A session. There will be two ways to submit your questions. If you'd like to ask your question personally, please use the numbers that are displayed on screen. These lines will be open following the presentation. Alternatively, please type your questions into the questions tab at the top right of the screen and we'll address them in turn. And with that, I'll hand over to Andy.

Thanks, Joe, and welcome and good morning, everyone. Thank you for taking the time to join us today. As ever, I'd like to allow for as much time as possible for you to ask questions, so I'll quickly run through the highlights from today's announcement before handing over to Sally. We've continued the positive momentum from the first half of the year and delivered another period of strong performance with a 5% increase in underlying sales. This was driven by particularly strong growth in English language learning and our assessment and qualifications division. We saw solid growth in workforce skills driven by the performance of both vocational qualifications and workforce solutions. In virtual schools, we're seeing positive retention rates and applications for our Connections Academy Career Pathways programme have been encouraging since its launch in June. Our higher education business continues to trade in line with expectations. Now, Sally will go into greater detail on the moving parts of the financials, but some key highlights are that inclusive access sales were up 26% year over year, and we continue to place focus on growing that part of the business. There's been encouraging growth in our platform products and Pearson Plus continues to perform well with around 30% growth in paid subscriptions versus the prior fall semester. As usual, we'll be providing complete metrics for Pearson Plus at our full year results. As a result of this continued sales growth and focus on efficiency and operating margins, we're upgrading our four-year guidance for adjusted operating profit by £20 million to between £570 and £575 million. In September, we launched a beta of generative AI tools in Pearson Plus and Mastering. These features summarise complex topics and offer students learning prompts and practice questions. While we're still in the early stages of the beta, we've been encouraged by what we're seeing. Students who are using the tools are showing strong levels of engagement with the features and we're gaining valuable insights about how students want help with their material and their work. Meanwhile, in English language learning, we've started a beta of several tools that use generative AI for speaking practice. We believe student expectations around AI will only increase and we remain confident that Pearson's in a strong position to benefit from generative AI. I'm also pleased that we've started delivering our trusted Pearson Test of English for student direct stream visas in Canada. And we're ready to deliver PTE for economic immigration visas as soon as we receive a start date from the Canadian authorities. We're excited by the size of the opportunity in Canada and we'll be investing in building our brand awareness in this competitive market. In India, we recently opened one of our largest Pearson VUE testing centres with the capacity to deliver 14,000 tests a month. That's to accommodate the demand for the high-stakes testing, including Pearson Test of English. In assessment and qualifications, the integration of PDRI continues to progress well, with a number of new contract wins for assessment services across the US federal government, including the Department of Homeland Security and the United States Air Force, amongst others. Across the business, we remained focused on the execution on all aspects of our strategy, the delivery of our cost efficiency programme, and on our transformation efforts to build a digital-first and consumer-orientated company. To conclude, we've made excellent progress across Pearson and remain confident about our future growth prospects. We're well positioned for the company's next chapter, bolstered by the amazing talent we have here within the group. Now, I'll hand you over to Sally, who'll talk you through the financials.

Thanks, Andy. And hi, everyone. We continue to see a strong performance in 2023, with revenue growth excluding OPM at 5% year-to-date. We're firmly on track to deliver the full year revenue growth we guided to at the beginning of the year and anticipate being in the upper end of that guidance range. We're also raising our profit guidance, the details of which I will talk through in a minute. The divisional revenue highlights follow the themes we have guided to. Assessments and qualifications revenue grew 8%, driven by an excellent performance in Pearson VUE, particularly in IT and healthcare. There was also good growth across US student assessments, clinical and UK and international qualifications, due to new contract wins, good government funding and price increases. Following the disposal of polls within OPM, our virtual learning underlying growth is reported excluding this part of the business. The virtual learning revenue decrease of 20% is therefore driven by the loss of the ASU contract, which will, as expected, continue to impact growth in Q4. Virtual schools revenue declined 4%, impacted by the loss of the major school. Excluding that, enrolments were up 2%, demonstrating an underlying return to growth following normalisation post-Covid. Whilst this trend for enrolments is positive, as we move into 2024, we should remember the business will be impacted by the loss of a further large school in the 2024-25 academic year. Higher education revenue was down 5%, in line with expectations, driven by pricing mix and the anticipated deferral of revenue into Q4, given the growth of Pearson Plus and platform products. Excluding the revenue recognition phasing impact, revenues declined low single digit, in line with our expectations for the full year. Recently published NSC data suggests Fall 23 enrolments in Pearson's addressable market are up 1%, meaning the impact on enrolments in the year-to-date financials is flat. You may have seen that the NSC headline was growth in enrolments of 2%. The difference between these two data points takes into account undergraduate certificates, a market Pearson is not in, and the weighting of two-year and four-year colleges and freshman students. Clearly, both data sets are hopeful, if not yet a trend. English language learning revenue was up 34%, with Pearson Test of English continuing to perform strongly across most markets. Our institutional business and Mondly also delivered strong growth. Workforce skills revenue grew 8%, with solid performance in both vocational qualifications and workforce solutions. Turning to the group outlook for the remainder of the year. Full year group revenue growth which we have guided to excluding OPM will be at the higher end of the low to mid single digit range we've guided to. Virtual schools and higher education growth is expected to be in line with the guidance we gave at prelims and interims. Assessments and qualifications growth will be mid-single digits. English language learning growth will be at least 25%, and workforce skills growth will be high single digit. We're investing a portion of the English language operating leverage into growth opportunities, and that will continue into 2024 and beyond. We are upgrading our full year adjusted operating profit guidance to 570 to 575 million pounds. This is at the current trending average pound to US dollar FX rate for the full year being 1.24. Previous guidance as published on Buma was £568 million at a dollar pound rate of 1.2, which equates to £552 million at the 1.24. The upgrade to £570 to £575 million of circa £20 million is driven by the expectation that revenue will grow at the higher end of that guided range. We remain on track to deliver £120 million of cost efficiencies in 2023 with group margin to improve to mid-teens. Our tax rate is expected to be in the range of 23 to 24% and the interest charge is expected to be circa £35 million. As usual, we will provide guidance for 2024 with our full year results. Our £300 million share buyback is progressing well and our financial position remains strong. And finally, we look forward to seeing many of you at our investor seminar focused on our assessments and qualifications business on Monday 6th November. The event will be held in person at the New York Stock Exchange and also virtually for those unable to attend in person. And with that, I will hand back to Andy.

Thanks a lot, Sally. So, as you've heard, we've delivered yet another quarter of growth and strategic progress. And to reflect that strong performance, we upgraded our full-year guidance. Now, this is my last earnings presentation as CEO of Pearson and I want to thank all of you for your interest and support across the last three years. In particular, I respect and appreciate the recognition that the Pearson of today is a very different company from the one I joined three years ago. The really exciting part of this story is that we're only just beginning. When I became CEO, I had one primary objective, to set this company up for sustained growth. What comes next is extremely exciting and will play into the unique assets that Pearson possesses. I'm truly delighted that we've been able to appoint Omar as Pearson's new CEO. He is, in my mind, the right person to build on the company's success to date and its journey of transformation and growth as a digital, consumer-focused business. In the meantime, we remain focused on moving the company forward and building on the solid foundation that we have in place. There's a lot of momentum across the business. The whole of the company is working together with an unwavering focus on execution. So we're well-placed to keep building trusted relationships with consumers and delivering value for shareholders, underpinned by a robust strategy and a leadership position in sustainability. And with that, Sally and I would be happy to take your questions. Jo, over to you.

Thanks, Andy. I can see quite a few people on the line. So, operator, can we take the first call, please?

Thank you. Our first question for today comes from Luke Holbrook of Morgan Stanley. Luke, the line is now open. Please go ahead.

Yeah, good morning, everyone. Thanks for the opportunity to ask questions. Yeah, morning. Just a few from my side on higher ed. I guess the first one is, can you just give us a bit more detail on what's pricing mix versus the revenue recognition part and how that looks Q3 to Q4, given the 8% decline in Q3? The second is, can you just comment a little bit locally on what you're seeing on print and platform, maybe versus e-textbook in the segment? And then just finally, are you noticing any cannibalization at all from Pearson Plus and how that compares versus the e-textbook business? Thank you.

Shall I take the first two and you take the last one? So the pricing mix point is one that we've talked about before. As the business moves from a print business to a digital business, it moves out of the higher price point print and package products into the lower price point e-text and digital. and platform-only product. As we've talked about before, that is something that has a flaw to it. So we saw a decline in print and package as we were expecting in Q3, and I'd anticipate that by the end of the year we've got... a million, maybe less from a unit's perspective in print and package. And then the rec piece is the piece that I highlighted at interim, so completely as expected. As we move into digital... We recognise the revenue over a period of time which crosses over Q3 and Q4. And therefore, whilst it's kind of building the third quarter, the revenue recognition from a top line perspective is over those two periods. So we've got a proportion that's moving from Q3 to Q4 as our digital products grow. as our digital products grow. And from a Q3 specifically point of view rather than year to date, that revenue recognition is around about the same number between Q3 and year to date. And then you've got a denominator which is smaller for the quarter than it is for the full year, and hence the percentage. And then... On the print and platform versus e-text piece, I mean, that's exactly the portion that I was talking about in terms of that pricing mix. You've got, as expected, a shift out of print and packages into our digital products, so Pearson Plus, platform and e-texts.

And, hey, Luke, as regards Pearson Plus, as I mentioned, 30% year-over-year Q3 growth in subscriptions, 80% growth year-to-date. So that gives you a sense of the growing importance of Pearson Plus within higher education. What's also... Very, very encouraging, and I referenced is the study tools within Pearson Plus. You're seeing Pearson Plus evolve beyond just an e-text reader. We started last year with channels, not only academic channels, but of course life skill channels. And with the addition of generative AI within the study and channels piece, linking video to questions that students are having, we're seeing a real take up and a constant evolution in that space. And you're going to see also an increasing role for Pearson Plus in terms of inclusive access. And you'll start to see that as we roll through into 2024. We started to see that this year and you'll see more of that as we roll into 2024. It's all about being, you know, student first, consumer first, totally digital. And what I love about Pearson Plus. is it's a constantly evolving product. It's not a fixed product. It's constantly evolving. Every other day I'm getting screenshots from Tony about, what about this? How do we do this? So I'm very, very excited about the roadmap for Pearson Plus and some of the other things beyond higher education that the team are working on busily in the background.

Thank you. Our next question comes from Adam Berlin of UBS. Adam, your line is now open. Please go ahead.

Hi, good morning. Yes, Adam Berlin from UBS. Just two questions from me, please, if I can. Just on higher ed again, did you win adoption share in this full kind of sales process, given the investments you've made in products? Because that was something that wasn't in the release. So just helpful. Maybe you don't have all the data right now, but what do you think happened in terms of adoption shared into this full season? And the second question just on workforce skills and workforce solutions. Can you give us a kind of update on where the feedback is for your workforce solutions software product? I noticed the Q3 growth was a little bit slowed down for the workforce skills group as a whole. Is the guidance for double-digit growth in workforce skills still relevant? Thanks.

Hi, Adam. Good to hear from you. So in terms of adoption share, we do have a data set. But as you've just said, it's quite early on in the process. So we've only got about 60 percent of that data set. And because of the way it's pulled together by an external party and to do with a very boring IT thing, one of the big retailers isn't in there yet. But the indications from that early data set is that we've maintained market share. But, well, I'll update you more once we've got the full data set of the full year.

And as it relates to workforce skills, Adam, and particularly workforce solutions, of course, there are two parts to the workforce skills numbers. The first is essentially our vocational qualifications, BTEC. And then the workforce solutions, we're seeing good growth in the workforce solutions. I think that's the area that you're particularly focused on. In fact, Sally and I meet with the team weekly and I'm very encouraged by seeing the progress that's been made in terms of both the number and the quality of clients we're getting in the pipeline, in the sales lead pipeline, increasing size of contracts. And the decision to move, as we mentioned, at interims to a more modular solution cell is really starting to pay off because every company, and it's not just companies, by the way, it's also governments, are interested in tailor-made, bespoke solutions to their particular challenges. And when they get to see us create bespoke solutions, we really see a good product market fit. So I feel encouraged by the progress that the team is making. There's no doubt there's increasing demand. There's more and more companies. governments and other institutions become aware of the need. We're moving to, as I've often said, a skill-based economy. And more and more enterprises, institutions are looking for answers to help them solve their skill-based problems. We are a perfect fit for them.

Operator. Our next question comes from Tom Singlehurst of Citi. Tom, your line is now open. Please go ahead.

Yeah, thank you for taking the questions, Tom here from Citi. And Andy, thank you very much for all the hard work over the last three years. You've been unfailingly enthusiastic and energetic, so very much appreciated. The first question is on, in particular, English language learning. Both ANQ and ELL have been very strong in the quarter. You've raised the four-year guidance, but I suppose both require a significant slowdown in the fourth quarter or imply a significant slowdown. For ANQ, you've already flagged some timing issues there, but for ELL, what are the moving parts there? I mean, are we just moving into a faster, natural level of growth because of the opportunity in Canada or... And does that alter the mid-term guidance? That's the first question. And then a second one on virtual schools. I mean, the underlying, underlying performance in the third quarter looks like it's fairly okay, but you obviously have lost the contract, which we already knew about. And I think, Sally, you mentioned you've lost another one for 24-25. So could you just talk about the competitive dynamics there and what's driving that? the contract losses and how they might be mitigated going forward.

Should I take both of those? Yeah. So in English language learning, so growth of at least 25% for the full year, which is obviously a fantastic performance. You'll remember that in the first part of the year, and actually starting about this time last year, we've had the tailwind from the Australian government, the fact that unemployment has been very low there, and therefore their migration policies have meant that they've, you know... gone for increased migration into the country. We always expected and guided to the fact that that would slow down in the second half of that year. And that's exactly what we've seen happen. And we expect that kind of level to continue on a go forward basis. Then, of course, growth coming from the win of that Canadian contract that we've got, which comes online at the end of this year. So to be completely clear, The student part of that is online already. Volume's relatively small at the start of that as expected. The immigration piece, we're just waiting for a few boxes to be ticked before that goes live. So lots to be really optimistic about in terms of English language learning as we look into the future. And then for virtual schools, as you pointed out, Tom, post that kind of COVID normalisation, underlying engrowing... underlying enrolments up. We said at prelims that we had two larger schools that we've lost, one affecting this year that we're currently in, so the 23 to 24 year, one impacting the 24 to 25 year. This is a normal part of these types of business. And then it just takes a little bit of time for us to get a new school up and running to take over from that. So we're really enthusiastic about this part of the business. in the medium and long term. We just need to get over this kind of transitioning period right now. And the other point to make is that we have gone live with our first career academies and those are showing really good signs for them as well.

Yeah, I just add, firstly, thanks for the kind words, Tom, and I'm enthusiastic and full of optimism because I believe that there's amazing things that are going to happen with this company. All I've done is basically provide the foundations for future growth. So my optimism, I believe, is well-founded. I'll just add on the ELL piece. Of course, as we mentioned in the prepared remarks Sally mentioned, part of what we'll be doing, Gio and the team are doing, is putting marketing behind the opening of Canada to increase awareness that Canada is now coming on. So you're going to see some marketing spend as we go into the first parts of the end of this year, into 2024, to increase awareness as that opportunity opens. opens itself up. Operator, next question, please.

Thank you. Our next question comes from Lisa Yang of Goldman Sachs. Lisa, your line is now open. Please go ahead.

Good morning. Thanks for taking my question and best of luck as well. The first one is on high education. I'm just wondering, given the better than expecting enrollment data, I was, by the way, curious how that compares with your expectations, but given it's up 1%, does that increase your confidence that revenue could return to positive growth in 2024 or is this more something for 2025? So just keen to hear your thoughts on the growth inflection there. So that's the first question. The second one is on Canada. You said you were very excited by the Canada opportunity. Do you think it can maybe help us quantify what sort of opportunity we could be thinking of over time? How do typical new contracts like this ramp in terms of revenue and profits and over how many years and at what time does it become marginally credit? That's the second question. And I think certainly just in general on tax location, just wondering if you can maybe give us a bit of an update. So for the share buyback, you've done already a third in less than two months. So it should be done basically by the time of your full year results. So is the plan just to continue similar share buyback on an ongoing basis or whether you think, you know, there's potential greater location towards M&A, especially in workforce scale funds and to strengthen your position there. Thank you.

There's a three for me.

I believe they are.

Thank you, Lisa. So in higher ed and enrolments, as I said, you can see the headline there from the NSC was 2%. That includes all years of college, all types of college. different sorts of certificates. So we've looked at the underlying detailed data and adjusted it for the things that I mentioned in my prepared remarks. And the kind of Pearson impact of the 2% is actually 1%. Again, as I said in my prepared remarks, I think that's a hopeful sign, if not a theme as yet. Another one of the data points in the detail is that we continue to see that increase in younger people enrolments, so they're 17 and under, what's called dual enrolment, which is showing, I guess, an indication that people are interested in going to college. But it's as simple as that. and the growth that we've indicated for higher education, that is driven by the opportunity in the secondary market and all the things that we've done in order to improve market share, both in the sales team and from a product point of view. We're not relying on enrollment growth in 2024 to get to that, but obviously it would be helpful and add to the confidence. Canada and the opportunity, as I've said, we've gone online with SDS. As Andy mentioned, we're putting marketing behind that and immigration will come online as we enter into next year as well. As you saw when we got Australia recognition, that will then build market share over the next year. few years. That's something that we've demonstrated that we can do and as I think people know PTE is a really lovely profitable part of the business and it creates a real synergy between the assessments and qualifications business that we've got and the English business that we've got. and then on the share buy back um the way things are trending at the moment it does look like we might be complete by the end of the year but obviously that's to do with what happens uh in the markets the board will then apply our capital allocation policy investment in the business strong balance sheet uh our dividend policy and you know we'll make a decision on any further returns uh in in due course but you know We'll apply that capital allocation policy as we go. Thanks very much, Lisa.

One thing just to add, Lisa, on the higher ed enrolments, just struck me very interesting. When you dig beneath those headline numbers, you see that we are seeing that actually the return to college of a lot of students who left during the pandemic... And so they're now coming back to complete their degrees. And I find that very encouraging, along with the interest of dual enrollments from younger cohort, as Sally mentioned. The fact that colleges, you know, people left because the pandemic presumably went and worked. and are now returning. So if you look between the breakdown between first, second, third, fourth year enrollments, you'll see that actually it's weighted beyond the fresher year. And that signals that there are students actually who had left. we presume because of the pandemic, who are coming back. So it seems that there is increased interest in going to college. How that plays out next year, we'll wait and see. Operator, next question, please. Thank you.

Our next question comes from Nick Dempsey of Barclays. Your line is now open. Please go ahead.

Yeah, good morning, guys. I've got three. So first of all, a bit of a double question on virtual schools. I mean, had you previously told us that one of the schools that you were losing was going to impact the academic year starting in September 24? I don't think I'd understood that. And then we can see that your competitor, your listed competitor, Stride, is having a really strong year, shares up organic growth, outperforming everyone's expectations. But are they winning these schools away from you? And is that a trend? Is that something that they're doing differently to you? Or is this not to do with strife? That was one question. Second question, given that we continue to see declines in higher ed in 2023 and just a small increase in enrolments, and given that your visibility has typically been quite low, what gives you the confidence that you will indeed return to positive growth? in 2024 and the last question uh yeah i suppose just going into english language learning again i mean if we look at the start of next year we've got a very tough comp in australia and we've got the start of the canadian opportunity could english language learning growth be a little weak because of those comps first before canada starts to really flow through

Thanks, Nick. Shall I start and you can compliment?

Yes, I'll interject.

So on virtual schools, yeah, absolutely. We did talk about both of those at prelim, so it's absolutely as expected and the team have been working since the beginning of the year on setting up the processes to get the new skills on board in order to offset that. In terms of Stride, it was great to see that they've come out with strong results, demonstrating the strength in this business. They've had enrolments that have been slightly lower over the last couple of years, so I don't think this is a share thing. I think it's just a kind of recovery from their point of view. And The schools don't quite work like that in terms of schools being taken over from a competitor. What tends to happen is that schools decide to bring things back in-house. You'll remember that they quite often then decide to come back to us after a period of time. We had one of those at the beginning of the year. So I don't think it's a kind of strive versus us thing. I think we're both in the market, see real opportunity in the market, and there's more than enough enrolment growth for us to both go after. From a higher ed point of view, I think there's two things which we've talked about in the past that continue to be what give me confidence in the future. There is the secondary market recapture, and as we've discussed before, That has been from a kind of demand side point of view over recent years. The supply side of that is coming into account now. So as I said earlier, you know, if you look back only a few years, print and package was like six million odd units. We're down to one million units and therefore the supply into that secondary market is less. And then the second opportunity is in order to gain market share. And that is driven by all the things that we've done in our supply. sales team where we're seeing the KPIs there looking really good. And then the things that we've done from a product point of view that we've talked about as well. So that's what gives me confidence putting enrolments to one side. And then in ELL, As expected, I think the Australia piece is flattening out now. We always expected that to happen. And Canada is in this year already from that SDS point of view. So that's ready and waiting for the beginning part of the year. And we expect the immigration piece to come online as well. So I'm still guiding to that kind of high single digits that we've looked at over that period of time. And that would be a good way of thinking about it as we go into next year.

Yeah, not much further to add to that, Nick. As I mentioned in my remarks, there's no shortage of demand for Pearson Test of English. Reference the test centre we opened in India. Remember, we have over 20,000 Pearson-viewed test centres around the world to service demand. As Sally said, I think you're going to see a slight flattening off in Australia, but that will be more than compensated over time with the opportunity in Canada, both in terms of immigration and also student visas. Operator.

Thank you. We currently have no further audio questions, so I'll hand back to the room for any written questions.

Thanks very much, Andy. I think all questions have answered through the line, so I will hand back to you to conclude.

Well, thank you very much. As I said, this is the last opportunity that we're going to have to speak at earnings. I'd like to thank all of you for your interest in the company, as I said before. It means a lot. I actually do read every single analyst report, even the bad ones. And I really, really value all of the feedback you've given us. It's been an amazing three years to think of where the company was three years ago and the fact that I spent the first... We didn't meet for ten months. No. In person, which is the first 10 months of restructuring the company, totally virtually in a pandemic. It's kind of interesting, but I've thoroughly enjoyed it. And I think on screen you see the leadership team. And whilst I may be struck off, and I think, Omar, you're watching this as well, we're leaving a great leadership team and continuity is really, really important because it's going to maintain the momentum and the strategic progress we have within the company. The other thing that's really interesting about that team is there's only you and Cynthia still have the same job three years ago. And talking of you, it would be remiss of me to not say thank you so much. I couldn't have done any of this without Sally's help. Always had my back. Incredibly, we as a company are incredibly, incredibly lucky to have you. I was incredibly lucky to have you. So thank you very, very much. Thank you. Please take care of her. Bye, all.