Two years into the leadership of chief executive Andy Bird, a promise to transform a business best known for university course materials into a digital-first learning company is under way.
“We no longer buy CDs, we listen to Spotify. We no longer buy DVDs, we watch Netflix,” the former Disney executive said six months into his tenure in an update to investors. “How we learn is also changing, driven by technology and new consumer habits.”
After a muddled strategy before his arrival and seven profit warnings in as many years, many investors think the company has reached a turning point. Underlying sales were up 6 per cent to £1.8bn in the first half of the year and Pearson is the best-performing stock on the FTSE 100: up 59 per cent.
Their optimism stems from Bird’s efforts to repurpose an established education company into a high-growth, high-margin disrupter in the digital arena, providing learning from school to college to the workplace.
“What we’re trying to do at the moment is just place the different building blocks,” Bird said in a recent interview with the Financial Times. “It’s very much the beginning of our journey . . . of what could be explosive growth.”
So far investors are on board — though with less breathless enthusiasm than the chief executive. Cevian, the activist shareholder with a 10 per cent stake, pointed to Pearson’s “high-quality assets” such as its textbook business and its wide customer reach, and welcomed plans to cut costs by £100mn in 2023. Partner Martin Oliw said the company had a “compelling vision” and a strong foundation for profitable growth.
One first step towards this growth is a subscription service, Pearson Plus. Launched by Bird last year, it offers users online access to all Pearson’s textbooks for $14.99 a month — an offer the company says will position it as a Spotify or Netflix, but for education.
Roger Wilkinson, head of equity research at Columbia Threadneedle, a top-10 Pearson shareholder, welcomed the move. He said Bird was “addressing the future”, grasping “the way people absorb learning and training has changed”.
At last count, the product had 4.5mn users, of which 329,000 were new paying subscribers and the rest existing Pearson users who were automatically signed up.
The relatively small number of new sign-ups does not seem to worry investors. Ian Lance, fund manager at top-10 Pearson investor Redwheel, likened it to Microsoft’s move from one-off purchases to a recurring revenue model. “It becomes a much more reliable, consistent stream of earnings,” he said.
Margins on those earnings can also rocket because — unlike Spotify or Netflix, which have to keep buying or creating new music or entertainment — education textbooks change little year on year, reducing the need to acquire new content.
“It’s just the students coming through the conveyor belt who learn the same things every year,” Wilkinson said. “Pearson already owns this content; they’re just basically expanding the audience.”
The rebranding comes on the back of a tumultuous few decades. Pearson started life as a construction company in the late 1800s and subsequently built a stake in media with the purchase of publishing, broadcast and news organisations. It was not until 2015, after the acquisition of learning companies such as Edexcel, Harcourt and Connections, that it largely shifted its focus to education.
For the past decade, Pearson’s core higher education division has been haemorrhaging sales to the second-hand market. Falling enrolment in US higher education put a dampener on growth. Plagued by profit warnings, Pearson’s sprawling jigsaw of education businesses looked cumbersome and stuck in the past.
Yet Bird insists the businesses he inherited will set the company apart. “I looked under the bonnet and I said, wow, there are some really interesting assets in this company,” he said. “We have at that time 90 per cent of the pieces of the jigsaw, we just need to make a new picture.”
Those assets include the content of textbooks, that can be repurposed in more lucrative formats such as online learning. Vocational BTec qualifications, VUE assessment centres for sitting professional qualifications and English language learning products are also growing.
Pearson has acquired Faethm, a tech company that assesses firms’ skills needs, and Credly, a platform for accrediting workplace training.
Bird’s hopes to consolidate these into a coherent offer for employers to retrain their workforce. Meanwhile the Pearson Plus subscription base can funnel customers to qualifications, training and accreditation throughout their lives.
“We go from diagnosis to learning to assessment then to certifying you . . . we’re the only company that does that,” Bird said.
Market sentiment backs up Bird’s swagger. “It’s about enabling companies to see them as a one-stop shop,” said Susannah Streeter, of Hargreaves Lansdown. “And it keeps beating expectations.”
With the share price now significantly surpassing its 870p bid, Pearson looks justified in rejecting a £7bn takeover attempt from private equity group Apollo in March.
Redwheel’s Lance calculated that if the company reaches its five-year targets, its share price could hit £12. “This has got the potential to be a really good business,” he said.
After a rough 10 years, however, some investors are more cautious.
Higher education accounts for at least one fifth of sales, but demand in the sector is shrinking as a result of falling birth rates and shifts away from universities. While the pace slowed this year, college enrolment declined 4.2 per cent since 2020, restricting Pearson’s market.
And while Bird’s focus on workplace training is designed to protect against these headwinds, some are sceptical that its offer matches the rhetoric.
Berenberg said the group’s “skew toward college” would slow down growth, and described the workforce skills unit as “subscale” and requiring significant acquisitions to compete with other companies in a crowded space.
One of those competitors is Cengage, which has also pursued an all-you-can-eat subscription for college students and moved into workplace training, including targeted acquisitions.
Investors do not need reminding that it is still early days. “It now has to make this vision more tangible, and show progress on execution,” said Cevian ‘s Oliw.
Nonetheless, after years of wandering, Pearson may finally be finding its way.