Different class

Pearson confronts harder financial times

A digital revolution in education means tougher financial times for Pearson. For years investors valued the British group on the basis that it was well-run, predictable and boasted a clear strategy. Now the core textbook business is under pressure as students trade second-hand volumes, swap electronic pirate copies, or simply rent and return expensive texts. Some of the old allure has gone.

Pearson shares fell sharply on February 25, after Chief Executive John Fallon used his maiden set of results to spell out the costs of re-orienting the company. Pearson had already warned in January that times were tricky, so the main surprise seems to be the extent of the restructuring. Including costs induced by splitting out Penguin books, which is being merged with Random House, the bill will come to £150 million gross. That is a substantial sum for a business with operating profit of £936 million.
 
Fallon also re-affirmed that the Financial Times was not for sale, which probably disappointed some shareholders. The business newspaper has looked increasingly anomalous as Pearson zeroes in on education, which made up nearly 85 per cent of operating profit last year. A strong balance sheet may now mean that Pearson does not need the money. The group insists there are some cross-over benefits from running the business daily and things like English-language education, though these look quite small.

Half Pearson's sales are already outside print. This spans both digital products, such as online testing, and educational services, such as selling "schools in a box", with bundled software, textbooks and curriculums. Fallon's goal is to lift the proportion to 70 per cent by 2015. There is much rhapsodising, too, about the promise of emerging markets, where a burgeoning middle class sees qualifications and better English as passports to prosperity. Chinese households spend 13 per cent of their income on education - eight times the proportion spent by British families.

All this will take time. Investors must wait until 2015 to see benefits in growth, margins and cashflow. In the meantime future-proofing the company makes sense �" as anyone who's read a good business text book would know.