Pearson : Financial Document

Pearson Nine-Month Trading

Update

Friday, 15th October 2021

Pearson Nine-Month Trading Update

Friday, 15th October 2021

Welcome

Joanne Russell

Senior Vice-President, Corporate Communications and Investor Relations

Good morning everyone. Welcome to Pearson's nine-month trading update. If you have any questions, please put them in the chat function during the presentation. With that, I will hand over to Andy.

Nine-Month Trading Update

Andy Bird

Chief Executive, Pearson

Hi, good morning, thanks a lot Jo and welcome, everyone, to today's Q3 trading update call. I hope you are all keeping safe as well.

As you can see, I am here in London, at long last, with our Chief Financial Officer, Sally Johnson. The two of us will briefly run through the presentation, before taking any questions that you may have.

Encouraging progress

So, turning straight to the presentation. We continue to deliver the new strategy at pace, with momentum in the business helping us to deliver strong operational and financial progress, despite the continuing effects of COVID-19 in some markets.

We have a strong management team in place, who are laser focused on execution, we have successfully launched our learning service in the third quarter and we are confident that we can deliver long-term sustainable growth underpinned by a strong balance sheet.

Highlights

Moving on to the highlights, our group financial performance for the nine-month period is encouraging, with underlying revenues up 10% and our full-year outlook continuing to be in line with market expectations.

Q3 has seen a slightly different shape to that which we originally anticipated, with a stronger performance in Assessment & Qualifications helping to offset a COVID-led decline in enrolments in US Higher Education Courseware, which I will come back to in a moment.

Our Pearson+ service has got off to a good start. It is only 12 weeks since launch but importantly, we have seen a strong response from students, faculty and authors.

So, overall, we are on track to deliver in line with the guidance we set out in March.

Strong performance from Assessment & Qualifications

I'd like to start by focusing on our Assessment & Qualifications division.

Revenue grew 24% year to date, with a strong performance across Pearson VUE, School Assessment and Clinical Assessment.

As I have mentioned before, everything that we do across the whole company has the potential to lead to some form of assessment, qualification, or certification. The COVID-19 pandemic has accelerated the trend of more people looking to upskill and reskill. We have

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seen this particularly in Pearson VUE, our professional certification business, through its strong growth this year, driven by continuing demand particularly in the IT sector, as more people look to find work in the digital economy.

US Higher Education impacted by lower enrolments, particularly in community colleges, due to COVID-19

This encouraging performance helped offset declining enrolments in US Higher Education Courseware. As you know, we anticipated a recovery in enrolments this year, given both the number of deferrals of students going to college in fall 2020 and a successful vaccine rollout in the US in the first half of the year.

While no market data for the full back-to-school period is available as of yet, our own internal analysis and channel checks indicate that weighted enrolments have likely declined close to mid-single-digit, with particular weakness at community colleges.

We believe that this has been driven by a surge in the delta variant over the summer months, as this graphic shows. This spiked dramatically in July and continued through the key back to school period in August. This, combined with a strengthening of the US labour market, appears to have resulted in fewer enrolments, particularly, as I mentioned, in community colleges.

In addition, we also saw an impact on our print-digital mix, with print and packages continuing to decline in favour of platform and e-texts but not as acutely as we have seen in previous years. We believe this was due to two short-term issues.

Product Listing Ad position

Firstly, advertising restrictions were introduced by Google earlier in the year, as the industry seeks to address the issue of digital book piracy.

Product Listing Ads, otherwise known as PLAs, an example of which you can see on this slide, were removed for all digital books globally. That meant that when students searched for their texts, they were only shown print textbook options. No digital books were allowed to be advertised, including our own Pearson+ service. We believe that this has influenced purchasing towards print textbooks.

Secondly, this back-to-school period essentially had two cohorts of students attending on campus for the first time. We had both this year's freshers and last year's freshers. So, more students were making their first trip to campus bookstores, which we believed influenced their purchases.

Pearson+ service

As I said, we are encouraged by the uptake of our Pearson+ service so far. In just 12 weeks we have acquired over 2 million registered users, reflecting a strong uptake from MyLab and Mastering users and more than a 100,000 incremental paid subscriptions.

I know that many of you have been following the launch intently, so I think it's worth explaining why we're reporting both sets of numbers in terms of the overall registered users and a subset of paid subscriptions.

We consider total registered users as the key reporting metric. The reason for this is that our aim is to establish Pearson+ with as large a number of consumers as possible and to continue

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to expand this reach as we build out the capabilities of the product going forward and we look forward to a lifetime of learning.

Having a large and growing customer base using Pearson+ gives us a powerful understanding of our users' learning preferences and needs. This allows us to iterate and further enhance the learner experience, as well as deliver better outcomes and product effectiveness. As our reach expands, so will our capabilities, enhancing our ability to serve more consumers and creating a positive flywheel for Pearson+.

It is also important to understand how students consume digital content in a learning context. Many students access their e-texts solely through a browser, usually on a laptop, as that provides the largest real estate to work on. So, to understand the total reach of the product we are sharing registered users' data. Publicly-available app download data only tells part of the story, as the app itself is a subset of the overall usage experience.

In addition, one of the other ways of accessing the Pearson+ service is, of course, through the app store. There we have seen a rating of 4.7. Alongside this, the service has a conversion rate which has risen threefold since launch. We have had a positive response from students, as well as from faculty and authors, which shows strong product market fit.

As expected, the revenue contribution is still pretty small at this stage, as we scale. We expect that to change as we build awareness, add more content and launch new features and products onto the platform.

I am sure you will have some questions on Pearson+, so let me pause there and hand over to Sally, who will run you through the financials, before I come back to give an update on our progress in more detail. Sally?

Financials

Sally Johnson

Chief Financial Officer, Pearson

Good financial progress

Thanks Andy and good morning everybody. So, as Andy has said, overall we have seen good financial progress through the first nine months. Revenue has grown 10%, with strong virtual learning growth and post-COVID recovery in Assessment & Qualifications and English more than offsetting an expected decline in Higher Ed.

Running through each of the elements by division, in Virtual Learning, revenue grew 14%, with strong growth in Virtual Schools due to enrolment growth in the 2020-21 academic year and school district partnerships.

In Online Programme Management, underlying growth was offset by the impact of discontinued programmes in the US and Australia, the impact of which we expect to end this year. Course enrolments grew 8% percent on an underlying basis.

In Virtual Schools, we've seen slight enrolment growth for the 2021-22 academic year, due to the continuing uncertainty around COVID-19 in the US. Revenue will be broadly flat in H2, as enrolment growth has been offset by pricing mix, with the uneven enrolment distribution across US states.

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In Higher Education, revenue was down 7%, as growth in international courseware, including Canada and the UK, was offset by a 9% decline in the US. We expected US HE courseware to be down by less than last year, which it was. However, the decline would have been lower had it not been for the weaker enrolments than anticipated.

As we look to the longer term and the resolution of the PLA challenge Andy outlined, we remain confident in the opportunity to recapture the secondary market.

We are also encouraged by President Biden's Build Back Better proposal, which includes access to tuition-free community colleges. If passed, this will support enrolments, which should benefit the industry over the longer term.

In English Language Learning, revenue grew 15%, due mainly to a COVID-19 recovery from 2020. PTE revenue grew strongly, as test centres largely reopened, albeit pressure remains due to reduced global mobility and border closures in our key Australian market. We see strong future growth opportunities as borders reopen and in the UK-bound market with the winning of the UK Home Office SELT contract in 2019.

English courseware rebounded strongly, driven by international growth across most of our markets. However, growth in China was impacted in the third quarter by the recent government reforms.

In our Workforce Skills business, revenue grew 5%, mainly due to the growth in GED and Talent Lens, which had been impacted by COVID-19 in 2020. BTEC and apprenticeship revenue was flat.

Last, but certainly not least, our Assessment & Qualifications business had a strong performance, with revenue up 24%. Q3 saw growth in each element of the division despite a challenging comparison, for VUE in particular.

In Pearson VUE, sales grew strongly, due to recovery post COVID-19, as well as ongoing high growth in our online proctoring service, OnVUE, where test volumes rose to 2.3 million compared to 1.3 million in the same period in 2020.

US Student Assessment revenue grew strongly, following exam cancellations in 2020 with a phasing benefit in the third quarter, given a shift in some state testing to the fall.

In US Clinical Assessment, revenue rebounded strongly, with the reopening of schools and the delivery of a backlog of education assessments.

In UK School Assessment, revenue was slightly down, due to a higher rebate of exam fees to schools versus 2020, partly offset by growth in courseware. As a reminder, the rebate impacts revenue but not profit, as it is a return of saved costs to customers.

Revenue in those businesses under strategic review grew 7%, driven by a COVID-19 recovery in courseware and a phasing benefit in school purchases in South Africa in Q3 in 2021.

The strategic review of international courseware local publishing is moving into the next phase and we have begun marketing a substantial part of the business, as well as having completed our sale of Brazilian Sistemas, which we had announced in March.

We are in a strong financial position with low net debt and strong liquidity. At the end of nine months, net debt stood at around £700 million, compared to £900 million in 2020, with strong operating cashflow offset by dividends.

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