Pearson Plc is like the school kid who keeps breaking their teacher's heart. It shows glimmers of potential and then doesn't deliver.
For the last four years, CEO John Fallon has pledged to make the provider of textbooks and test papers smaller, more efficient, and a leader as the digital revolution comes to classrooms.
Instead, he's been stuck in a cycle of falling revenue, profit warnings, cost-cutting programs, and asset sales. More students are renting textbooks, hurting Pearson's biggest business of selling to U.S. colleges and universities. Unhelpfully, emerging markets, where Fallon had invested heavily, also slowed down last year.
The pattern means Friday's announcement of an additional round of cost reductions and plans to sell (or find a partner for) its U.S. schools business should be viewed with skepticism -- even if it did help to send the stock up by as much as 17 percent.
Pearson promised to eliminate 300 million pounds of expenses by the end of 2019, on top of the 650 million pounds of savings Fallon has made since his arrival.
But shareholders don't look as though they expect to get the full benefit. Pearson will forgo some profit if talks to sell its Penguin Random House business succeed and if it sells the U.S. schools operation. In that scenario, operating profit in 2020 would climb by about 115 million pounds, according to research by Citigroup. The present value of that increase is roughly equal to the gain in Pearson's market capitalization on Friday.
But if Pearson's recent history tells us anything, it's that the the promised benefits from cost-cutting tend to be eaten up by declines in revenue as the business weakens. Fallon says his team has learned how to cut jobs and lower expenses without disrupting things too much -- but that only gets harder after three rounds of cuts.
For now, analysts expect revenue to be about 4.7 billion pounds by the end of 2019, a mere 2 percent increase from 2016. That may be optimistic, even though the figure doesn't include any impact from the sale of the U.S. schools unit.
Lately, Pearson's problems have been concentrated in U.S. higher education market. It brings in about 25 percent of sales and 45 percent of profit. There, the company admitted that it doesn't expect improvements in the next two years, and that it needed to adjust the "cost base to the reality of a smaller higher education courseware business." The issues there are real and not temporary; students are increasingly rejecting expensive textbooks and turning to rental programs run by Amazon as well as cheaper online materials.
Fallon has come under fired for accepting a 20 percent pay rise for a year that led to a profit warning, dividend cut and plunge in the stock. Shareholders are likely to express their displeasure at Friday's annual general meeting. Fallon expressed contrition on Friday and said he had used his bonus to buy Pearson shares that very morning. Those are likely to be worth more after today's announcement -- but he is still a ways off from a real win.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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