Pearson's full year 2011 net income down 26.5% year-over-year to £956M where year-ago results saw £776M profit from discontinued operations; net sales up 3.5% to £5.9B influenced by doubled Penquin eBook revenues, higher FT Group profits

Kendall Sinclair

LONDON , February 27, 2012 (press release) – Financial performance

Sales up 6% at CER in spite of tough trading conditions in many markets.
Adjusted operating profit up 12% to £942m with growth in all businesses.
Adjusted EPS up 12% to 86.5p (headline growth).
Cash conversion remains strong at 104%; operating cash flow of £983m (£1,057m in 2010, which benefited from an unusually high working capital contribution).
Return on invested capital of 9.1%, above Pearson’s cost of capital; ROIC lower than in 2010 largely due to significant acquisition spend and higher cash tax.

Growth markets

Digital revenues up 18% in headline terms to £2bn, now 33% of Pearson’s sales. Substantial digital growth in all parts of Pearson including:
Students using our digital learning programmes up 23% to 43m.
Penguin eBook revenues up 106%; now 12% of total Penguin revenues.
FT digital subscriptions up 29% to 267,000; approximately 44% of total paid circulation.
Developing markets revenues up 24% in headline terms to $1bn ($834m in 2010), now 11% of Pearson’s sales.

Efficiency

Operating margins reach 16.1% (up 1.0% points)
Average working capital: sales ratio improved to 16.9% (20.1% in 2010).

Investment

Sustained organic investment of approximately £500m in new products and technologies.
£896m invested in acquisitions including Schoolnet and Connections Education in North America and Global Education in China.
Strong balance sheet (net debt of £499m) and approximately £1bn of headroom available for bolt-on acquisitions.

Dividend

Dividend raised 9% to 42.0p, representing Pearson’s 20th consecutive dividend increase.

Outlook

Pearson expects to achieve continued sales and operating profit growth in 2012, in spite of tough trading conditions and rapid industry change.
Revenues from digital and services businesses expected to exceed revenues from traditional publishing businesses in 2012.

Marjorie Scardino, chief executive, said: “The external environment provides a testing backdrop for these results, and all our industries face some degree of turbulence. But our strategy and long-term planning for change have helped us to another good year to add to our record of persistent out-performance. We believe those qualities, combined with the commitment and innovation of our people, will continue to serve our customers and our shareholders well.”

FINANCIAL HIGHLIGHTS

DIVISIONAL ANALYSIS

NORTH AMERICAN EDUCATION

• The US higher education publishing market was broadly level with 2010, according to the Association of American Publishers, with solid revenue growth in public colleges offset by enrolment declines in for-profit colleges following changes in Federal regulations.
• Pearson gained share, benefiting from its lead in technology and customisation, and has now grown faster than the US higher education industry for 13 consecutive years.
• Pearson’s pioneering ‘MyLab’ digital learning, homework and assessment programmes grew strongly with student registrations in North America up 22% to almost 9 million. Usage continues to grow strongly with graded submissions up 39% to more than 250m across the globe. Evaluation studies show that the use of MyLab programmes can significantly improve student test scores and institutional efficiency (http://bit.ly/ymMMAi).
• We developed a new model of enterprise-wide support for online higher education with Arizona State University Online and Ocean Community College. Through these long-term partnerships, Pearson runs the full online learning programmes for these institutions and earns revenues based on the success of the institution and its students.
• Pearson LearningStudio increased fully-online student enrolments by 20% to 10m. Renewal rates remain high at more than 80% by value with fewer large accounts up for renewal in the year.
• We launched OpenClass, a dynamic, scalable and cloud-based Learning Management System which encourages social learning and is easy and free to use.

• Revenues at our Assessment and Information division grew modestly in 2011. State funding pressures and the transition to Common Core assessments continued to make market conditions tough for our state assessment and teacher testing businesses; these were offset by good growth in diagnostic and clinical assessments.
• We signed several important contracts including state-wide student assessment contracts in New York, Kentucky, and Arizona; Race to the Top Florida formative assessment; Indiana educator licensing and Ohio pre-service teacher assessment. We also renewed three important contracts, extending our relationships with Virginia and Maryland for state-wide student assessments and with ETS to service state-wide assessments for California.
• We signed an agreement with Stanford University to provide the capability to deliver the Teacher Performance Assessment (TPA)—a nationally available, web-based performance assessment for measuring the effectiveness of teacher candidates.
• We delivered 13 million secure online tests in 2011 with strong growth in automated written and spoken assessment scoring volumes. We won the Online Assessment Readiness Tool contract from both the PARCC and SBAC Common Core consortia to help 45 states prepare for the transition to online assessments.
• PowerSchool supported more than 10 million students, up 6% on 2010, and developed its platform to enable 18 additional languages to be used on the PowerSchool parent portal.
• Our clinical assessment business grew well, boosted by strong growth at AIMSweb, our progress monitoring service which enables early intervention and remediation for struggling students. Usage of AIMSweb increased dramatically with 47 million assessments delivered in 2011, up more than 40%.
• We acquired Schoolnet, a fast-growing and innovative education technology company that aligns assessment, curriculum and other services to help individualize instruction and improve teacher effectiveness. Schoolnet serves more than five million US pre K-12 students through partnerships with districts and states, supporting about one-third of America’s largest cities.

• The US school textbook publishing market declined 9% in 2011, according to the Association of American Publishers. There were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $650m in 2011 against $800m in 2010) and delays in purchasing decisions during the transition to the new Common Core standards.
• Pearson gained share with a strong adoption performance boosted by our blended print-and-digital programmes including Writing Coach, Prentice Hall Math and enVisionMATH. We took an estimated 37% of new adoptions competed for (or 31% of the total new adoption market).
• We acquired Connections Education which operates online K-12 schools in 21 states and a nationwide charter school programme. It served 33,200 students in 2011, up 43% from 2010. Connections Academy Schools have consistently high performance ratings, particularly in states focused on measuring growth in student learning.
• Successnet, our online learning platform for school teachers and students, generated more than six million registrations in 2011, up 5% on 2010. The number of assessments taken through Successnet increased by 32% to more than 11 million.
• We continue to develop digital programmes, platforms and apps to boost achievement, access and affordability. We launched two major new school programmes aimed at meeting rising literacy standards under the Common Core:
• i-lit (http://redefiningliteracy.com), a personalised digital reading programme. It combines our proven literacy model (with many students making two years of literacy growth in a single year), automated assessment capabilities and compelling literature from Penguin and Dorling Kindersley, all delivered through iPads.
• Pearson English Learning System, which benchmarks, monitors and tracks both student progress and teacher best practice to boost English language skills.
• Poptropica (www.poptropica.com) is one of the largest virtual worlds for young children in the US and was named by Time as one of “The 50 Best Websites of 2011”. Poptropica has up to 9.7 million monthly unique visitors from more than 130 countries.

INTERNATIONAL EDUCATION

• Wall Street English, Pearson’s worldwide chain of English language centres for professionals, increased student numbers by 9% to more than 190,000. We opened 19 new centres around the world, bringing the total number close to 450.
• More than 0.9m students registered for our MyLab digital learning, homework and assessment programmes, an increase of 35%. They included more than 150,000 MyEnglishLab registrations, up 70%, and 28,000 registrations for our high school mathematics programme MathXL, a 54% increase.
• We developed a new model of enterprise-wide support for online higher education with the University of New England (UNE) in Australia which will launch in 2012. The partnership enables UNE to expand its distance learning capacity and access to higher education and ties Pearson’s revenue to the success of the institution and its students.
• Our Fronter learning management system grew strongly with new contracts won in Malta, Tasmania and Poland. Active users rose by 18% to 1.3 million and their logins by 11% to 154m.
• Student test volumes for the Pearson Test of English Academic saw robust growth supported by recognition from almost 1,900 institutions including the Australian Department of Immigration & Citizenship and 95% of UK Universities.
• The Organisation for Economic Co-operation and Development chose Pearson to develop a competency and assessment framework for the 2015 cycle of The Programme of International Student Assessment (PISA) tests, one of the world’s most prestigious programmes of international tests.

• In China, student enrolments at our Wall Street English centres increased 25% to 53,000, boosted by strong underlying demand and the launch of 11 new centres. Our students continue to rapidly acquire high-level English skills with average grade levels achieved by our students rising by 11% during 2011.
• We acquired Global Education and Technology Group, a leading provider of test preparation services for English Language and other professional qualifications, for $155m in cash. Global Education has approximately 450 (115 owned and 335 franchised) learning centres in 150 cities across China.
• In South Africa we gained share in school publishing, but market conditions were tougher than expected during a year of major curriculum reform. Student enrolments grew strongly at CTI, up 13% to 8,700, which continues to deliver significantly better completion rates than its peers and strong job placement rates of 70%. We delivered half a million secondary textbooks for Physics, Biology and History to all Government secondary schools in Uganda, one million Junior African Writer readers to the Ministry of Education in Sierra Leone and almost two million textbooks in five subjects to secondary schools in Zimbabwe.
• In Brazil, we successfully completed the first stage of the SEB Pearson Sistemas integration with major investments and improvements across the business. Our Virtual Library grew strongly and now reaches 2 million students across 100 universities, and we entered the K12 publishing market. In Colombia, we implemented a bilingual teacher training program in several states and in Chile we won a contract to evaluate the national college admissions test.
• In India, we incurred costs related to the acquisition of TutorVista and invested to grow the business. We have doubled the number of schools managed by TutorVista to 24 and the installations of its multimedia teaching tool Digiclass to approximately 10,000. Vocational and Professional enrolments at our IndiaCan joint-venture grew more than 50% to 86,000, with particular strength in spoken English, Chartered Accountancy, Engineering and MBA qualifications.
• In the Middle East, our performance was boosted by sales of Reading Street and Scott Foresman Math in Saudi Arabian Schools; Giancoli Physics and Thomas Calculus along with strong MyLabs uptake in Turkish colleges; and Haeussler Mathematics and Hubert Engineering along with strong MyLab uptake in Egypt.

• Our UK business made solid progress during the year despite significant regulatory and policy changes in its markets, most notably in vocational and general qualifications, apprenticeships and in higher education.
• We marked more than 5.7 million GCSE, A/AS Level and other examinations with 90% using onscreen technology. We marked more than 3.8 million test scripts for over half a million pupils taking National Curriculum Tests at Key Stage Two in 2011 and have been selected to mark tests in 2012.
• Our Bug Club digital reading programme for primary schools combines engaging phonics-based books with games, assessments and teacher diagnostic tools to boost reading enjoyment and comprehension. In 2011, more than 145,000 online users in almost 900 schools subscribed to Bug Club online.
• We acquired EDI plc, a leading provider of education and training qualifications and assessment services, with a strong reputation for the use of information technology to administer learning programmes and deliver on-screen assessments. Registrations for our own BTEC Apprenticeships more than doubled to 80,000 students.

• We launched the Australian edition of our pioneering US digital maths curriculum, enVisionMATH. We have more local versions in development to bring high quality digital curriculum to new markets across the globe.
• In Italy, our new digital curriculum helped us gain significant share in lower secondary adoptions and to see good growth overall.
• In Germany, we acquired Stark Holding, a leading provider of education materials including test preparation resources for pupils and teachers.
• In Japan, we faced major disruption following the March 2011 tsunami but maintained operations and achieved notable successes, particularly with the Versant Test of Communicative English and the launch of BTEC.

PROFESSIONAL

• We continued to see good revenue and profit growth at Pearson VUE, which administered more than seven million tests during the year, benefiting from sales of additional services to customers and contractual fee increases. We won a number of new contracts including the Construction Industry Training Board in the UK, the National Council of Examiners for Engineering and Surveying in the US, and the HP certification examination worldwide.
• We formed a joint venture with the American Council on Education to develop an online General Educational Development (GED) test aligned with new Common Core standards. The GED test measures an adult’s high school level knowledge and skills in math, reading, writing, science and social science.
• We launched a new touch-screen theory driving test for the Roads and Transport Authority for Dubai. The test is delivered in Arabic, English and Urdu. The new test follows the opening last year of a new Pearson VUE office in Dubai to meet the Middle East’s demand for computer-based testing.

• Despite significant regulatory and policy changes in the apprenticeship market, Pearson in Practice successfully graduated its largest IT cohort and launched or enhanced several new apprenticeship programmes in logistics, construction, management and customer service, business and health.
• We acquired TQ Holdings Ltd which provides technical education and training services to governments, institutions and corporations around the world with particular expertise in skills related to the defence, engineering, oil and gas and construction sectors.

• Our resilient performance in the US benefited from the breadth of our publishing and range of revenue streams, from online retail through digital subscriptions. As a result, digital products and services now account for more than 25% of our professional publishing revenues in the US. In some International markets such as Japan, professional publishers continued to face very challenging trading conditions.
• In the US, we launched MyGraphicsLab which integrates 50 hours of videos, 250 creative projects, 50 presentations and 1,000 quiz questions with real-world assignments to prepare students for the job market.

FINANCIAL TIMES GROUP

• The FT produced strong and accelerating growth in its digital readership with online subscriptions up 29% to 267,000, 2,000 direct corporate licences and FT.com registered users up 33% to more than 4 million. Combined paid print and digital circulation reached 600,000 in 2011, the highest circulation in the history of the FT. At the end of 2011, digital subscribers exceeded print circulation in the US for the first time. The Average Daily Global Audience across print and online grew 3% to 2.2m people worldwide, our largest audience ever.
• Readership continues to migrate online and to mobile, which now generates 19% of traffic to FT.com. We launched FT web apps optimised for iPad and Android devices including a custom app for India. The web apps provide FT subscribers access to our content online and through mobile devices with a single subscription and data analytics allow us to better serve our customers. We also acquired Assanka, the FT’s web app development partner, which we expect to yield benefits in FT Group and across Pearson.
• Advertising was generally weak and volatile with poor visibility. Growth in online advertising and the luxury category was offset by weakness in corporate advertising.
• FT Conferences had a very strong year, operating 75 events in 37 cities worldwide. Almost 9,000 senior executives from around the world attended these events.
• We launched the FT Non-Executive Certificate (in partnership with Pearson Learning Studio and Edexcel) in April 2011, enrolling more than 100 students. The certificate is designed to aid the professionalisation of the sector and increase diversity on UK boards. It is the first fully accredited formal education product for Non-Executive Directors.
• We extended the breadth and depth of the FT’s premium subscription services through the launch of Brazil Confidential, extending our successful China Confidential franchise into another growth market; Medley Global Advisors (MGA) grew modestly despite challenging conditions for its customers due to new contract wins; Money-Media grew strongly fuelled by an increase in subscriptions and advertising.

• Mergermarket’s strong editorial analysis continued to benefit from its global presence and product breadth. Usage increased, new sales grew and renewal rates were strong. Continued volatility in debt markets helped sustain the strong performance of Debtwire whilst volatile equity markets benefited dealReporter’s event-driven strategy. Mergermarket saw strong growth in Asia-Pacific while MergerID continued to benefit from a broadening network of users and strong growth in transaction matches.
• We launched a large number of new products, extending our reach into new geographies (US wealthmonitor, ABS Europe, dealReporter Middle East, dealReporter Russia Desk), new strategies (multi-strategy products), new coverage areas (municipal bonds, dividend arbitrage) and new platforms (mergermarketiPad app).

• The Economist, in which Pearson owns a 50% stake, increased global weekly circulation by 1% to 1.49 million (for the July-December 2011 ABC period) with an additional digital circulation in excess of 100,000; total annual online visits increased to 165m, up 39% on 2010.
• Business Day and Financial Mail (BDFM), our50% owned joint-venture in South Africa with Avusa, improved profitability with revenue increasing by 10%. The business benefited from growth in advertising and circulation revenues.
• We sold our 50% stake in FTSE International to the London Stock Exchange for net proceeds of £428m in December 2011. It contributed £20m to Pearson’s operating profit in 2011.

PENGUIN

• A strong and consistent publishing performance across imprints and territories produced market share gains in the US, UK and Australia, our three largest markets in a very challenging retail environment with the closure of more than 750 stores.
• Growth in developing markets was boosted by the strength of the direct marketing channel and strong publishing in India, including its first 100,000 copy bestseller (Ravinder Singh’s Can Love Happen Twice?). In China, Penguin launched a new English language publishing programme.
• Global publishing properties such as LEGO®, Wimpy Kid, Jamie Oliver and Kathryn Stockett’s The Help sold in significant numbers in multiple markets.
• In January 2012, we acquired 45% of Companhia das Letras, a leading trade book publisher in Brazil, with whom we have an existing Classics publishing partnership.

• eBook revenues doubled on the previous year and accounted for 12% of Penguin revenues worldwide, and more than 20% in the US, in 2011. Since the beginning of 2008, digital downloads of apps and ebooks across the group have totalled approximately 50 million.
• Penguin continued to invest in digital innovation, launching more than 100 apps and enhanced eBooks, including Wreck this App, On the Road and Moshi Monsters, and a new global digital-only publishing programme, Penguin Shorts.
• DK launched its first non-travel apps including the award-winning DK Human Body. In January 2012 DK became the first consumer publisher to publish four iBooks2 titles using Apple's new authoring tool.
• Penguin continued to invest in direct-to-consumer initiatives including new digital platforms for readers, specifically aNobii in the UK and Bookish in the US. In Australia Penguin acquired the REDgroup’s online business. Penguin also signed its first author through its new self-publishing platform BookCountry. Its websites and social media channels around the world now have a global following of more than 11 million.
• Penguin continued to leverage Pearson-wide digital platforms to transform its internal publishing processes, enabling faster product development and greater re-use of content.

• In the US Penguin published a record 254 New York Times bestsellers including some of its repeat bestselling authors such as Tom Clancy, Patricia Cornwell, Ken Follett, Nora Roberts and Clive Cussler, as well as new talent such as Deborah Harkness, Amor Towles and Eleanor Brown. Kathryn Stockett’s The Help was the bestselling title across the US industry selling five million copies in print and digital in its third year since publication. The Young Readers’ division had another strong year achieving a high of 41 New York Times bestsellers.
• Penguin UK published 78 top ten bestsellers, an increase of 15 on 2010, including two of the top five industry titles with Jamie Oliver’s 30-Minute Meals and Dawn French’s A Tiny Bit Marvellous, and a robust performance by Penguin Children’s who were named Children’s Publisher of the Year in 2011. For a second consecutive year, Jamie Oliver secured the coveted Christmas number one slot with Jamie’s Great Britain. Jeff Kinney’s new Wimpy Kid title Cabin Fever sold 300,000 copies and was the fastest selling book of 2011.
• DK’s bestseller success continued in 2011 with its LEGO® titles dominating the bestseller charts including The LEGO® Ideas Book, LEGO® Star Wars Character Encyclopaedia and LEGO® Star Wars Visual Dictionary. Titles from authors such as Annabel Karmel, Karl Pilkington and Mary Berry and the MasterChef titles also performed strongly.
• In Australia, Penguin had the two top-selling titles across the industry with Jamie’s 30-Minute Meals and Jeff Kinney’s Cabin Fever and hit number one 24 times through the course of the year.
• Penguin has a strong publishing list for 2012 with major new books from authors including Tom Clancy, Ken Follett, Charlaine Harris, Nora Roberts, Deborah Harkness, Junot Diaz, Kofi Annan, John Grisham and Richelle Mead in the US, and Jamie Oliver, David Walliams, Pippa Middleton, Dawn French, Marian Keyes, Clare Balding, Zadie Smith, Neil MacGregor, Michelle Paver, Philip Pullman and Jacqueline Wilson in the UK. DK will launch more LEGO® titles including the Ninjago Character Encyclopaedia, LEGO® Batman:The Visual Dictionary and LEGO® Friends Brickmaster, as well as titles from bestselling authors such as Mary Berry and a new MasterChef title. New digital properties for 2012 include Skylanders and global gaming franchise, Risen.

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