Pearson Buys Time

The textbook publisher's second restructuring in three years may not go far enough

Pearson is asking investors for patience as it embarks on its second big restructuring since 2013. In return, it made the surprise move to keep its dividend. Shareholders should still be wary.

Pearson's Problem

The company's stock is down 42 percent over the past year

Source: Bloomberg News

The education company is underestimating the deep changes technology is having on its business and is ill-equipped to manage a sprawling operation that spans 80 countries.

On Thursday, Pearson unveiled plans to eliminate about 4,000 jobs, or a tenth of its staff, amid falling demand for textbooks and dwindling college enrolments in its key U.S. market. Earnings will drop in 2016, and are unlikely to return to growth until 2018.

It's the company's fourth profit warning since CEO John Fallon took over. He's tried an overhaul before: one of his first acts when he took over in 2013 was to embark on a two-year, 220 million-pound ($311 million) restructuring aimed at retooling the company for an era of iPads in the classroom and growth in emerging markets.

That plan delivered annual cost savings of 100 million pounds, some of which was invested in new digital products -- but it failed to spark the hoped-for growth in sales. Fallon himself has said Pearson's revenue hasn't grown in underlying terms in five years. Organic growth was zero in 2014, down 1 percent in 2013, and up 1 percent in 2012.

Going Nowhere

Pearson's revenue from continuing operations

Source: company filings

The company remains reliant on the U.S. market for 60 percent of operating profit and sales. There it sells textbooks and online courses to universities, and courseware for elementary to high schools to states.

Both are under pressure: fewer people are going to university amid a strong job market and a political row has hurt Pearson's sales of books and tests under a program of national educational standards called Common Core.

Ian Whittaker, an analyst at Liberum, says the U.S. business has an existential problem, not a cyclical one as Pearson has argued. Students who can't afford to pay hundreds of dollars for books and are turning to sharing and rental plans, or even open-source, free books. Wiley, a U.S. competitor, blamed books rentals as a key factor hurting the market late last year when it scaled back its own sales goal.

Pulling off the restructuring, which will cost 320 million pounds this year and save 350 million pounds annually, will be difficult especially if the U.S. troubles persist. Pearson said its 2018 profit goal depends on six assumptions, including revenue growth next year, winning market share in the U.S., and successful new product launched in China and Brazil. Success isn't assured in any of them.

Restructuring Hit

Pearson's adjusted operating profit

Source: company filings

2018 is company target

The shares rose as much as 17 percent on Thursday, the biggest one-day gain since March 2002, in part because the company kept the dividend. But Pearson's market value is still down by more than 40 percent in the past year.

Keeping the dividend will placate shareholders, but it may not be a sustainable decision. Pearson paid about 400 million pounds in dividends in 2014. The dividend won't be covered by earnings by 2018, Liberum estimates.

Pearson has better uses for the money. Industries from music to taxis have been disrupted by the rise of the Internet and mobile communications. The education business will be no exception, even if changes have been slower given the inertia of school systems. The publisher will need to invest in R&D and acquisitions to keep up.

Pearson Chairman Sidney Taurel, a former pharmaceutical executive, appears to be backing his CEO -- for now. If Fallon makes another stumble on earnings, or has to cut the dividend, that may change.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Leila Abboud in Paris at

    To contact the editor responsible for this story:
    Edward Evans at

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