By Kate Holton
LONDON (Reuters) - Education group Pearson said it would cut more costs and put its U.S. school publishing unit up for sale, sending its shares soaring with the latest attempt to revive a business that has been undermined by the move to digital learning.
The 173-year-old British company has been hit by a sharp downturn in its biggest markets, issuing five profit warnings in four years, as students ditch more expensive text books for second-hand copies and digital services.
Its shares jumped 15 percent on Friday however when it said it would cut a further 300 million pounds ($388 million) a year by 2020 to help restore earnings growth. However, Chief Executive John Fallon warned there would be no quick fix.
"For the next year or two we think the negatives will continue to outweigh the positives so we are running the business on the basis that things will not get better any time soon," Chief Executive John Fallon said.
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"But they will get better, there is a point in two or three years time when that pendulum shifts."
Employing 35,000 people, the British group provides everything from textbooks to school testing, college courses and online degrees around the world.
Having grown rapidly since 2008, it started to lose its way in 2015 when the U.S. economy recovered, encouraging more people to take jobs rather than go into higher education.
In 2016 the shift to digital services in the U.S. stepped up a gear, leading to an "unexpected and unprecedented" 14 percent drop in the U.S. higher education teaching materials market.
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Investors are divided between those who think governments will always need to invest in digital learning services, and those who think the industry is facing the same disruption as that already endured by the newspaper and music industries.
Fallon, who is under fire for his handling of the downturn, said the company's move to digital products was helping the company to become more efficient. He has taken out more than 650 million pounds of costs in the last four years.
The new savings will come from general and administrative expenses and from North America, it said.
Pearson will review its U.S. school courseware publishing business, which it said had been slow to switch to digital. It said the division required high levels of investment and was facing a challenging market environment.
Pearson, which had lost a quarter of its market value in the nine months before Friday's update, said first-quarter trading had been in line with guidance and stuck to full-year targets.
Analysts said the new plan should boost earnings as the cost cuts come through.
"Each 100 million pounds of savings assumed in 2018 would add around 20 percent to consensus earnings per share," analysts at Citi said.
However not everyone was convinced by the strategy.
"Past evidence suggests that extra cost savings at Pearson do not lead to more profits, it just offsets revenue declines," said Ian Whittaker, an analyst at Liberum who has a key "Sell" rating on the stock.
The strong share bounce may help Fallon when he appears at the company's annual meeting later on Friday, facing questions over why he was given a 20 percent pay rise in 2016.
He told reporters on Friday he had spent his 2016 bonus on buying new Pearson shares.
($1 = 0.7737 pounds)
(Reporting by Kate Holton; Editing by Paul Sandle and Keith Weir)
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
