Pearson Plc Q2 FY2023 earnings call

Management Statement and Operational Highlights

• Financial Performance: In H1 2023, Pearson achieved 6% revenue growth and 44% profit growth to £250 million, with improved margins from the cost efficiency program.
• Product Initiatives: Pearson Test of English expanded its reach with recognition in Canada and continued growth in India; Connections Academy launched a career pathways program for students; PDRI acquisition was completed, and TSA exams started being delivered; Higher Ed made strides in LMS integrations and iLab products; Workforce Skills secured new contracts.
• AI and Innovation: Focused on integrating generative AI into products to enhance the learning experience, with examples in Pearson+ and MyLab & Mastering where AI tools were used to improve student learning.
• Portfolio Reshaping: Completed the disposal of the polls business and acquired PDRI, repositioning the portfolio towards future growth opportunities.

Segment Performance

• Assessment & Qualifications: Revenue grew 7%, driven by strong performance in Pearson VUE, particularly in IT and healthcare segments. Completed the PDRI acquisition and started delivering TSA exams. Revenue contribution from this segment is a significant portion of the overall group.
• English Language Learning: Revenue grew 44% led by the Pearson Test of English, which saw strong demand in markets like India and received migration and study recognition in Canada. Contributes a notable percentage to total revenue.
• Workforce Skills: Revenue grew 9% with progress in vocational qualifications, including winning new contracts in Jordan and the UK. Drives a portion of the group's revenue growth.
• Higher Ed: Revenue down 2% due to enrollment declines and loss of adoptions to non-mainstream publishers, but showed progress in LMS integrations and iLab products.
• Virtual Learning: Revenue decreased 15% primarily due to the ASU contract element, but virtual schools maintained good retention rates.

Guidance

• Full Year 2023: Confident in meeting group expectations with low to mid-single digit revenue growth (excluding OPM and strategic review) and mid-teens profit margin.
• English Language Learning: Raised 2023 revenue growth expectation from high-single digit to around 20%, with investment in future growth initiatives like opening test centers in India.
• Workforce Skills: Growth guidance for 2023 and 2022-2025 is more stretching due to focusing on customer-specific, customizable solutions.
• Pearson+: Continued growth in subscriptions, with revenue recognition shifting from Q3 to Q4.
• Share Buyback: £300 million share buyback commencing in Q3, interim dividend increased by 6% to £0.07.

Risks

• Generative AI Risks: Potential legal and legislative challenges associated with generative AI, need to ensure reliability, accuracy, and trustworthiness of AI products to maintain user trust.
• Market and Portfolio Risks: Seasonal nature of segments like English and Higher Ed, potential impact of contract timings and the ASU contract termination on future growth.

Question and Answer Q: On Higher Ed improvement in Q2 and full year guidance A: Q2 growth was due to Pearson+ revenue recognition, and the company is confident in hitting full year guidance with improvement in Higher Ed Q: Share buyback start and duration A: Share buyback commencing in Q3, following normal cash flow patterns for Pearson, with paperwork in progress Q: A&Q 7% growth and second half outlook A: 7% growth is good for the year, but Q4 revenue growth may be lower due to contract timing, though confident in full year guidance Q: Workforce Skills strategy change A: Shift to customizable solutions meeting customer-specific needs, focusing on modular, personalized workforce solutions Q: Cash flow and product development spend A: Cash product development spending is in line with P&L amortization, with convergence of spend and amortization narrowing the previous gap Q: Polls business contract closures impact A: Positive effect from contract closures in the first half, with revenue recognition and profit impact reversing in the back half Q: Generative AI in products, open source, servers, ML team A: Using ChatGPT behind the scenes via Azure, testing open source models, having its own ML team, and focusing on data privacy and security