Pearson PLC (LON:PSON) has announced its 2023 Preliminary Results (Unaudited).
Financial Highlights
| £m | 2023 | 2022 | £m | 2023 | 2022 | |
| Business performance | Statutory results | |||||
| Sales | 3,674 | 3,841 | Sales | 3,674 | 3,841 | |
| Adjusted operating profit | 573 | 456 | Operating profit | 498 | 271 | |
| Operating cash flow | 587 | 401 | Profit for the year | 380 | 244 | |
| Free cash flow | 387 | 222 | Net cash generated from operations | 682 | 527 | |
| Adjusted earnings per share | 58.2p | 51.8p | Basic earnings per share | 53.1p | 32.8p |
Highlights
| · | Underlying Group sales growth1 of 5%, excluding OPM2 and the Strategic Review3 businesses. |
| · | Group adjusted operating profit of £573m, up 31% on an underlying basis compared to 2022 with significant expansion in adjusted operating profit margin from 11.9% to 15.6%, underpinned by sales growth and execution of £120m cost efficiency programme. |
| · | Operating cash conversion of 102% driving 74% headline increase in free cash flow. |
| · | Proposed final dividend of 15.7p, resulting in full year dividend up 6% to 22.7p. |
| · | Clear capital allocation priorities underpinning £300m share buyback launched last September and today announcing intention to extend share buyback programme by £200m. |
| · | Positive outlook for 2024 and 2025 in line with expectations and Group guidance unchanged. Free cash flow expected to further improve next year due to lower restructuring cash costs. |
Omar Abbosh, Pearson’s Chief Executive, said:
“2023 was another year of strong operational and financial performance, with results surpassing initial expectations once again, driven by our Assessment & Qualifications and English Language Learning businesses. Our consistently strong cash generation has sustained investment to support our future growth and deliver ongoing value for shareholders.
“Pearson is a strong company with excellent market potential, people committed to our mission, and a purpose that genuinely helps communities. My conversations with our customers, our people and our investors have confirmed that and more. Pearson is well positioned today, providing a stable platform for continued growth that can benefit from the inflection point we see with the development of AI. I am optimistic about the opportunities this advancement in technology brings, underpinned by our trusted brand, large high quality data sets and strong capabilities in assessment, content and services. We have an exciting future ahead of us.”
2024 priorities
| · | We will deliver on current 2024 market expectations4 for Group underlying sales growth and adjusted operating profit given the strength of our core businesses, alongside a disciplined focus on organic growth, customer expectations and execution. |
| · | The range and quality of products across our business supplying the vast Enterprise market presents a large and still forming opportunity, which we plan to maximise. |
| · | We will continue to infuse our products and services with a wide range of AI solutions and capabilities to ensure we lead on innovation for our end consumers. |
| · | We will provide a business and strategic update at our interim results in July. |
Underlying sales growth1 of 5%, excluding OPM2 and Strategic Review3 businesses; 1% in aggregate
| · | Assessment & Qualifications sales were up 7% largely driven by a strong performance in Pearson VUE with good progress in IT and healthcare alongside the commencement of new contracts. There was also good growth across US Student Assessments, Clinical and UK & International Qualifications, due to new contract wins, good government funding and price increases. |
| · | Virtual Learning sales decreased 20%, primarily due to an expected 87% decrease in the Online Program Management (OPM) business resulting from the previously announced ASU contract loss. Virtual Schools sales declined 2%, with enrolments for the 2023/24 academic year lower due to the previously announced loss of a larger partner school. |
| · | Higher Education sales were down 3%, in line with expectations, driven by loss of adoptions to non-mainstream publishers in the first half of the year, as well as pricing mix. Pearson+ continued to perform well, passing the milestone of 1 million cumulative paid subscriptions for the calendar year. |
| · | English Language Learning sales increased 30% with all three segments contributing to this growth. Pearson Test of English (PTE) was the outstanding contributor, delivering volume growth of 49% against a backdrop of favourable migration policy in Australia and market share gains in India. |
| · | Workforce Skills sales grew 11% for the full year, with a solid performance in both Vocational Qualifications and Workforce Solutions. |
Adjusted operating profit1 up 31% on an underlying basis to £573m
| · | Performance driven by sales growth and execution of the £120m cost efficiency programme, partially offset by investment and inflation. Adjusted operating profit margin rose to 15.6% (2022: 11.9%). |
| · | Headline growth was 26% reflecting business performance along with portfolio changes and currency movements. |
| · | Adjusted earnings per share grew to 58.2p (2022: 51.8p) reflecting adjusted operating profit growth, normalisation of tax and interest charges and the reduction in issued shares as a result of share buybacks. |
Cash performance
| · | Operating cash1 inflow increased on a headline basis from £401m in 2022 to £587m in 2023, representing excellent cash conversion of 102%. This increase is reflective of the trading performance of the business, good cash collections and reduced product development in Higher Education connected to the cost efficiency programme. |
| · | Our excellent cash conversion drove an increase in free cash flow from £222m in 2022 to £387m in 2023, a free cash flow conversion of 93%5. 2023 included £63m of cash restructuring costs in relation to the cost efficiency programme. |
Strong balance sheet supports continued organic and inorganic investment alongside increased shareholder returns
| · | We completed the acquisition of PDRI, significantly expanding Pearson’s services to the US federal government as well as growing our presence with large employers. |
| · | Year-end net debt of £0.7bn (2022: £0.6bn) with net debt / adjusted EBITDA ratio at 1.0x (2022: 0.8x). |
| · | Return on capital was 10.3% (2022: 8.7%). |
| · | Proposed final dividend of 15.7p (2022: 14.9p) which equates to a full year dividend of 22.7p (2022: 21.5p). |
| · | The previously announced buyback to repurchase £300m of shares continued. As at 28th February 2024 £288m of shares had been repurchased at an average price of 928p per share, representing 96% of the total programme. |
| · | Given the strength of our free cash flow in 2023 we intend to extend our share buyback programme by £200m. |
Statutory results
| · | Sales decreased 4% to £3,674m (2022: £3,841m) reflecting business performance, portfolio changes and currency movements. |
| · | Statutory operating profit was £498m (2022: £271m). The increase in 2023 was driven by increased trading profits and a reduction in the costs of major restructuring, partially offset by a net loss related to acquisitions and disposals compared to a net gain in 2022. |
| · | Net cash generated from operations of £682m (2022: £527m). |
| · | Statutory earnings per share of 53.1p (2022: 32.8p). |
Continued strategic and operational progress across the business
Advancing future growth drivers and building strong digital offerings
| · | In Assessment & Qualifications we won a number of VUE contracts that commenced in 2023 and maintained our high customer renewal rates. Within our UK & International Qualifications business we leveraged our technology capabilities to extend our onscreen exams offering with the roll out of GCSE Computer Science and International GCSEs in English Language and Literature. Within Clinical Assessment our high quality, trusted portfolio of intellectual property continued to be a source of competitive advantage, helping to drive growth in our Digital Assessment Library for Schools (DALS) product. We won subscription contracts with Chicago Public Schools and Miami Dade County School District. |
| · | In Virtual Schools we launched a new Connections Academy Career Pathways programme in five schools for middle and high school students, where we are offering a tri-credit approach to career-readiness courses in partnership with Coursera and Acadeum, amongst others. We saw encouraging enrolment trends in these schools and are planning to roll the initiative out to an additional 15 schools in 2024 to drive future growth. We are pleased to have secured two new schools in the States impacting the 2023/24 and 2024/25 academic years. |
| · | In Higher Education we made significant strides in converging our platforms to enhance stability and deliver upgraded, best-in-class features to improve our customer experience. Stability was much improved in the Fall semester with up time improving to 99.8% for our platform products. We also improved our technology support, leading to improved NPS scores amongst faculty during the peak Fall season. Within our product suite we introduced 6 new iLabs to take our total to 21. Generative AI study tools designed to help students better learn and understand challenging subjects were launched in beta within select titles for Pearson+ and Mastering for Fall back-to-school. We’re encouraged by how students are engaging with these tools, with over 60,000 AI conversations taking place in Pearson’s Tro Chemistry Mastering eText alone and 75% of users saying the tools were ‘helpful’ or ‘very helpful’. We have already expanded the beta to 12 additional MyLab and Mastering titles with at least 40 math, science, business and nursing titles to follow by Fall semester 2024. We delivered 2% growth in platform units in 2023. Pearson+ continued to grow, passing the milestone of 1 million cumulative paid subscriptions to reach 1,048k for the calendar year and we continued to build out our supplementary learning Channels offering, with 19 study channels now live. The changes we have made to our sales team and go to market strategy are delivering early signs of success including a number of takeaway adoptions in the Fall back to school selling period. We believe these changes set us up well for continued progress in 2024. |
| · | In English Language Learning, we have seen a strong increase in the number of users on our digital platforms. Coupled with investment in new digital content, including video and audio, and the strength of the Global Scale of English, we are confident that we are delivering engaging learning experiences while enabling teachers to better understand and meet the needs of their learners. In our Mondly enterprise focused business, we are launching Mondly by Pearson Workplace English, which benefits from workplace-specific content, leveraging our institutional courseware portfolio, and enhanced features. Coupled with investment in our Versant suite of tests, this strengthens our offering in the Corporate language learning space. |
| · | Within our Workforce Solutions business we evolved our offering from a unified product approach, building a powerful technology stack that has enabled us to break down core Faethm capabilities into modular application programming interfaces. We are seeing contract wins across digital credentialing and strategic workforce planning solutions with the likes of Cleveland Clinic and ServiceNow. |
Expanding our reach in new and adjacent markets
| · | In Assessment & Qualifications we acquired PDRI, a trusted provider of workforce assessment services. PDRI launched a full suite of hiring assessment programmes for the Transportation Security Administration and also won multi-year contracts with a number of other US federal agencies, including the US Air Force, Drug Enforcement Administration, Bureau of Alcohol, Tobacco, Firearms and Explosives, and Department of Homeland Security. Within VUE we expect to derive future growth from moving further up the technology certification value chain and we saw encouraging signs in this market in 2023. Within Clinical Assessment we made further progress in pursuing our strategy to partner with clinical pharmaceutical companies, winning a contract to deliver assessments to aid determining the effectiveness of a drug used in the treatment of Alzheimer’s disease. Our UK & International Qualifications business delivered good international growth in 2023. We see further opportunity for growth internationally across our Assessment & Qualifications businesses into 2024 and beyond. |
| · | In English Language Learning we won recognition for the Pearson Test of English for Canadian Student Direct Stream and economic immigration visa applications. This grants access to the full potential of the Canadian market, which is the largest of the three key markets which Pearson now has recognition to operate in. We launched PTE for Canadian Student Direct Stream visa applications in the second half of 2023 and opened bookings for PTE for Canadian economic immigration visa applications in February 2024. We continue to invest in building our brand awareness and testing capacity in the PTE market. We opened one of our largest company-owned Pearson VUE testing centres in Chandigarh, India. With the ability to deliver more than 14,000 tests per month, including PTE, this marks another step forward in the important Indian market, where based on the estimated market size we have seen market share gains throughout 2023. |
| · | In our Vocational Qualifications business we signed a contract with the Jordanian Ministry of Education to partner on the reform of Jordan’s technical and vocational education and training provision in schools with over 50,000 learners expected to take these courses over the next three years. International expansion will be an important growth driver for our Vocational Qualifications business going forwards. |
Delivering efficiencies and reshaping the portfolio
| · | We delivered £120m of cost efficiencies in 2023 across product and content support costs, technology and corporate property. |
| · | Cost efficiencies supported adjusted operating profit margin improvement from 11.9% in 2022 to 15.6% in 2023. |
| · | We disposed of our Pearson Online Learning Services (POLS) business, further focusing Pearson’s portfolio towards future growth opportunities. |
Outlook
2024 outlook
| · | We expect Group underlying sales growth, adjusted operating profit and tax will be in line with current market expectations4. Our interest charge will be c.£45m given our ongoing £300m share buyback and intended extension by a further £200m. |
| · | Every 1c movement in £:$ rate will equate to approximately £5m adjusted operating profit impact. |
| · | In Assessment & Qualifications we expect sales growth of low to mid-single digit. |
| · | In Virtual Schools we expect sales to decline at a similar rate to 2023, given the previously cited loss of a larger partner school for the 2024/25 academic year. We are pleased to have secured two new schools in the States impacting the 2023/24 and 2024/25 academic years and therefore expect the division to return to growth beyond 2024. |
| · | In Higher Education we expect to return to sales growth. |
| · | In English Language Learning we continue to expect high single digit sales growth. |
| · | In Workforce Skills we expect to achieve high single digit sales growth. |
| · | We expect a free cash flow conversion of 95-100%. |
2025 ambition
| · | We continue to expect the Group to achieve mid-single digit underlying sales 3-year CAGR from 2022 to 2025, excluding OPM and Strategic Review businesses, and remain on track to achieve our 16-17% adjusted operating profit margin guidance. |
Executive changes
We are excited about the growth opportunity across the enterprise learning market and working with organisations to address the challenges of building an adaptable workforce that is augmented by AI. Reflecting on our partnerships and capabilities, we are confident we can build on our existing products and services in the enterprise market to drive higher growth longer term.
Pearson announces the appointment of Vishaal Gupta as the new President of Workforce Skills.
Vishaal currently serves as a Senior Managing Director with Accenture. Vishaal is an enterprise sales leader who leads a team that originates and closes large and complex deals, particularly in the areas of Technology Transformation and Strategic Managed Services. Vishaal has over 29 years’ experience working in technology driven companies.
Mike Howells, President of Workforce Skills, will be leaving Pearson in March. Mike has led the evolution of our Workforce Skills division for the last three years, overseeing the development of our enterprise solutions business and further extending the international presence of our Vocational Qualifications business. We thank him for his contribution.
