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PEARSON PLC 20-F Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

Pearson, Plc

Filing date:

03/14/2025

TLDR:

ELI5:

Pearson, a learning company, made more money this year despite selling slightly less overall. They’re focusing on using AI to improve education and partnering with big companies to train their employees. While they’re doing well, some challenges remain, so it’s wise to be careful.

Accession #:

0001193125-25-054371

Published on

Analyst Summary

  • Underlying sales growth of 3% despite a headline decrease of 3% in sales, driven by growth in Assessment & Qualifications and English Language Learning segments.
  • Adjusted operating profit increased by 10% on an underlying basis, indicating improved efficiency and cost management.
  • Free cash flow increased by 26% with a conversion rate of 117%, demonstrating strong cash generation capabilities.
  • Management is focused on delivering market expectations, sharpening focus on the enterprise market, and accelerating AI capabilities.
  • Strategic partnerships with ServiceNow, Degreed, Microsoft, and AWS aim to address workforce development and skills gaps.
  • Gross Profit Margin increased from 49.95% to 50.98%.
  • Operating Profit Margin increased from 13.55% to 15.23%.
  • Net Profit Margin increased from 10.34% to 12.25%.
  • Basic Earnings Per Share (EPS) increased from 53.1p to 64.5p.

Opportunities and Risks

  • Opportunity: Leveraging AI to enhance learning experiences and drive efficiency.
  • Opportunity: Addressing the evolving needs of businesses for skilled talent through enterprise skilling.
  • Opportunity: Developing new approaches and alliances for talent development in early careers.
  • Opportunity: Collaborating with global companies to expand market reach and deliver customer solutions through strategic partnerships.
  • Risk: Potential termination or modification of accreditation due to policy changes.
  • Risk: Challenges in protecting intellectual property and differentiating content in the age of AI.
  • Risk: Inability to meet contractual obligations or transform as required by strategy.
  • Risk: Tighter migration policies, market pressure in English institutional sales, and price compression in the competitive marketplace.
  • Risk: Rising end-user expectations and potential loss of sales if not met.
  • Risk: Cyber security threats, data privacy concerns, and ethical considerations related to reputation and responsibility.

Potential Implications

Company Performance

  • Continued investment in AI and digital transformation could drive future revenue growth and improve profitability.
  • Strategic partnerships may expand market reach and provide access to new customer segments.
  • Effective management of financial risks, including increased net finance costs, is crucial for maintaining financial stability.
  • Addressing the decline in Virtual Learning sales is essential for overall segment performance.
  • The company’s commitment to sustainability and social impact may enhance its reputation and attract socially conscious investors.

Stock Price

  • Positive financial performance and strategic initiatives could lead to an increase in the company’s stock price.
  • Successful integration of AI and expansion of enterprise learning solutions may attract investor interest.
  • Concerns about Virtual Learning sales and increased net finance costs could negatively impact investor sentiment.
  • Overall market conditions and investor confidence in the education sector may influence the stock price.

Executive Summary

This report analyzes Pearson PLC’s Form 20-F filing for the fiscal year ended December 31, 2024. Key findings include underlying sales growth, strong adjusted operating profit margin, and a focus on AI integration and enterprise solutions. The overall assessment is cautiously optimistic, with a “Hold” recommendation. While Pearson demonstrates solid financial performance and strategic direction, uncertainties in the global economy and evolving regulatory landscape warrant a conservative approach.

Company Overview

Pearson PLC is a global learning company providing educational courseware, assessments, and services. The company operates through five main business units: Assessment & Qualifications, Virtual Learning, English Language Learning, Higher Education, and Workforce Skills (evolving to Enterprise Learning and Skills in 2025). Pearson is focused on creating and curating content, distributing content digitally and physically, and building and verifying skills. The company is navigating a rapidly changing educational landscape, with a strong emphasis on digital transformation and AI integration.

Financial Statement Analysis

Key Highlights:

  • Sales: £3,552 million (headline decrease of 3% from £3,674 million in 2023), but underlying sales growth of 3% (excluding OPM and Strategic Review businesses).
  • Adjusted Operating Profit: £600 million (increase of 10% on an underlying basis).
  • Free Cash Flow: £490 million (increase of 26%, conversion rate of 117%).
  • Dividend: Recommended 6% increase in final dividend to 24.0p per share.

Segment Performance:

Segment 2024 Sales (£m) 2023 Sales (£m) Underlying Growth 2024 Adjusted Operating Profit (£m) 2023 Adjusted Operating Profit (£m)
Assessment & Qualifications 1,591 1,559 3% 368 350
Virtual Learning 489 616 (4)% 66 76
Higher Education 826 855 1% 108 110
English Language Learning 420 415 8% 50 47
Workforce Skills 226 220 6% 8 (8)

Key Ratios:

  • Operating Margin: 16.9% (Group adjusted operating profit margin).
  • Free Cash Flow Conversion: 117% (Free cash flow divided by adjusted earnings).

Balance Sheet Highlights:

  • Net Debt: Increased to £853 million from £744 million in 2023.
  • Liquidity: Available liquidity of £1.2 billion (cash and undrawn revolving credit facility).

Management’s Discussion and Analysis (MD&A) Insights

  • Strategic Priorities: Management focused on delivering market expectations, sharpening focus on the enterprise market, and accelerating AI capabilities.
  • AI Integration: Significant expansion of AI-powered study tools in Higher Education, Virtual Learning, and English Language Learning.
  • Enterprise Partnerships: Signed strategic deals with ServiceNow, Degreed, Microsoft, and AWS to address workforce development and skills gaps.
  • Performance Culture: Implemented foundations for a performance culture with clear career tracks and optimized organizational spans of control.

Red Flags & Uncommon Metrics:

  • Decline in Virtual Learning Sales: Headline sales decreased by 21%, although underlying sales decreased by only 4%. This requires further investigation to understand the long-term impact.
  • Increased Net Finance Costs: Net finance costs increased significantly due to increased borrowings and losses on investments.

Risk & Opportunity Assessment

Risks:

  • Accreditation Risk: Potential termination or modification of accreditation due to policy changes.
  • AI, Content, and Channel Risks: Challenges in protecting intellectual property and differentiating content in the age of AI.
  • Capability Risk: Inability to meet contractual obligations or transform as required by strategy.
  • Competitive Marketplace: Tighter migration policies, market pressure in English institutional sales, and price compression.
  • Customer Expectations: Rising end-user expectations and potential loss of sales if not met.
  • Reputation and Responsibility: Cyber security threats, data privacy concerns, and ethical considerations.

Opportunities:

  • AI-Driven Innovation: Leveraging AI to enhance learning experiences and drive efficiency.
  • Enterprise Skilling: Addressing the evolving needs of businesses for skilled talent.
  • Early Careers: Developing new approaches and alliances for talent development.
  • Strategic Partnerships: Collaborating with global companies to expand market reach and deliver customer solutions.

Conclusion & Actionable Insights

Pearson PLC demonstrates solid financial performance and a clear strategic direction focused on digital transformation and AI integration. However, uncertainties in the global economy, evolving regulatory landscape, and competitive pressures warrant a cautious approach. The “Hold” recommendation is based on the following:

  • Positive Factors: Strong underlying sales growth, improved operating profit margin, and strategic partnerships.
  • Concerns: Decline in Virtual Learning sales, increased net finance costs, and potential risks associated with AI and regulatory changes.

Recommendations:

  • Monitor Virtual Learning Performance: Closely track the performance of the Virtual Learning segment and address the factors contributing to the sales decline.
  • Manage Financial Risks: Implement strategies to manage increased net finance costs and mitigate the impact of interest rate and currency fluctuations.
  • Navigate Regulatory Landscape: Proactively address evolving regulations related to AI, data privacy, and other areas.
  • Continue AI Integration: Invest in and scale AI-powered solutions to enhance learning experiences and drive efficiency.

Financial Analysis of Pearson plc – 2024 Annual Report

1. Commentary

Pearson plc’s 2024 financial performance shows a mixed picture. Sales decreased slightly, but adjusted operating profit increased, indicating improved efficiency. Strong cash generation is a positive sign, with free cash flow significantly exceeding the prior year. The company is investing heavily in AI and strategic partnerships, which could drive future growth. However, challenges remain in certain business segments, and the outlook for 2025 suggests moderating sales growth in some areas.

2. Financial Ratio and Metric Analysis

Profitability

Gross Profit Margin

  • Metric: Gross Profit / Sales = £1,811m / £3,552m = 50.98%
  • Trend: Previous year’s Gross Profit Margin = £1,835m / £3,674m = 49.95%. Percentage change = ((50.98-49.95)/49.95) * 100 = 2.06%.
  • Industry: The gross profit margin is within the range of educational publishers and service companies.

Operating Profit Margin

  • Metric: Operating Profit / Sales = £541m / £3,552m = 15.23%
  • Trend: Previous year’s Operating Profit Margin = £498m / £3,674m = 13.55%. Percentage change = ((15.23-13.55)/13.55) * 100 = 12.40%.
  • Industry: The operating profit margin is within the range of educational publishers and service companies.

Net Profit Margin

  • Metric: Profit for the Year / Sales = £435m / £3,552m = 12.25%
  • Trend: Previous year’s Net Profit Margin = £380m / £3,674m = 10.34%. Percentage change = ((12.25-10.34)/10.34) * 100 = 18.47%.
  • Industry: The net profit margin is within the range of educational publishers and service companies.

Return on Assets (ROA)

  • Metric: Profit for the Year / Total Assets = £435m / £6,892m = 6.31%
  • Trend: Previous year’s ROA = £380m / £6,727m = 5.65%. Percentage change = ((6.31-5.65)/5.65) * 100 = 11.68%.
  • Industry: The ROA is within the range of educational publishers and service companies.

Return on Equity (ROE)

  • Metric: Profit Attributable to Equity Holders / Total Equity Attributable to Equity Holders = £434m / £4,038m = 10.75%
  • Trend: Previous year’s ROE = £378m / £3,974m = 9.51%. Percentage change = ((10.75-9.51)/9.51) * 100 = 12.93%.
  • Industry: The ROE is within the range of educational publishers and service companies.

Earnings Per Share (EPS)

  • Metric (Basic): 64.5p
  • Metric (Diluted): 63.5p
  • Trend (Basic): Previous year’s EPS = 53.1p. Percentage change = ((64.5-53.1)/53.1) * 100 = 21.47%.
  • Trend (Diluted): Previous year’s EPS = 52.7p. Percentage change = ((63.5-52.7)/52.7) * 100 = 20.50%.
  • Industry: The EPS is within the range of educational publishers and service companies.

Liquidity

Note: To calculate these ratios, we need current assets and current liabilities. From the consolidated balance sheet:

  • Current Assets = £2,728m
  • Current Liabilities = £1,478m

Current Ratio

  • Metric: Current Assets / Current Liabilities = £2,728m / £1,478m = 1.85
  • Trend: Previous year’s Current Ratio = £2,431m / £1,404m = 1.73. Percentage change = ((1.85-1.73)/1.73) * 100 = 6.94%.
  • Industry: A current ratio of 1.85 indicates good liquidity.

Quick Ratio (Acid-Test Ratio)

  • Metric: (Current Assets – Inventories) / Current Liabilities = (£2,728m – £74m) / £1,478m = 1.80
  • Trend: Previous year’s Quick Ratio = (£2,431m – £91m) / £1,404m = 1.67. Percentage change = ((1.80-1.67)/1.67) * 100 = 7.78%.
  • Industry: A quick ratio of 1.80 indicates good liquidity.

Cash Ratio

  • Metric: Cash and Cash Equivalents / Current Liabilities = £543m / £1,478m = 0.37
  • Trend: Previous year’s Cash Ratio = £312m / £1,404m = 0.22. Percentage change = ((0.37-0.22)/0.22) * 100 = 68.18%.
  • Industry: A cash ratio of 0.37 indicates adequate liquidity.

Solvency/Leverage

Note: To calculate these ratios, we need total debt and equity. From the consolidated balance sheet:

  • Total Debt (Current and Non-Current Borrowings) = £1,472m
  • Total Equity = £4,053m
  • Total Assets = £6,892m
  • Finance Costs = £112m
  • Finance Income = £81m

Debt-to-Equity Ratio

  • Metric: Total Debt / Total Equity = £1,472m / £4,053m = 0.36
  • Trend: Previous year’s Debt-to-Equity Ratio = £1,161m / £3,988m = 0.29. Percentage change = ((0.36-0.29)/0.29) * 100 = 24.14%.
  • Industry: A debt-to-equity ratio of 0.36 indicates moderate leverage.

Debt-to-Assets Ratio

  • Metric: Total Debt / Total Assets = £1,472m / £6,892m = 0.21
  • Trend: Previous year’s Debt-to-Assets Ratio = £1,161m / £6,727m = 0.17. Percentage change = ((0.21-0.17)/0.17) * 100 = 23.53%.
  • Industry: A debt-to-assets ratio of 0.21 indicates moderate leverage.

Interest Coverage Ratio (Times Interest Earned)

  • Metric: (Profit Before Tax + Interest Expense) / Interest Expense = (£510m + £112m) / £112m = 5.55
  • Trend: Previous year’s Interest Coverage Ratio = (£493m + £81m) / £81m = 7.09. Percentage change = ((5.55-7.09)/7.09) * 100 = -21.72%.
  • Industry: An interest coverage ratio of 5.55 indicates the company can comfortably cover its interest expenses.

Activity/Efficiency

Note: To calculate these ratios, we need additional information from the income statement and balance sheet.

  • Sales = £3,552m
  • Cost of Goods Sold = £1,741m
  • Inventories = £74m
  • Trade and Other Receivables = £1,030m
  • Trade and Other Payables = £1,054m

Inventory Turnover

  • Metric: Cost of Goods Sold / Average Inventory = £1,741m / £74m = 23.53
  • Trend: Previous year’s Inventory Turnover = £1,839m / £91m = 20.21. Percentage change = ((23.53-20.21)/20.21) * 100 = 16.43%.
  • Industry: An inventory turnover of 23.53 indicates efficient inventory management.

Days Sales Outstanding (DSO)

  • Metric: (Average Accounts Receivable / Sales) * 365 = (£1,030m / £3,552m) * 365 = 105.87 days
  • Trend: Previous year’s DSO = (£1,050m / £3,674m) * 365 = 104.37 days. Percentage change = ((105.87-104.37)/104.37) * 100 = 1.44%.
  • Industry: A DSO of 105.87 days indicates the average length of time that a company takes to collect revenue after a sale.

Days Payable Outstanding (DPO)

  • Metric: (Average Accounts Payable / Cost of Goods Sold) * 365 = (£1,054m / £1,741m) * 365 = 221.14 days
  • Trend: Previous year’s DPO = (£1,275m / £1,839m) * 365 = 252.74 days. Percentage change = ((221.14-252.74)/252.74) * 100 = -12.50%.
  • Industry: A DPO of 221.14 days indicates the average length of time that a company takes to pay its invoices.

Asset Turnover

  • Metric: Sales / Average Total Assets = £3,552m / £6,892m = 0.51
  • Trend: Previous year’s Asset Turnover = £3,674m / £6,727m = 0.55. Percentage change = ((0.51-0.55)/0.55) * 100 = -7.27%.
  • Industry: An asset turnover of 0.51 indicates how efficiently a company uses its assets to generate sales.

Valuation

Note: To calculate these ratios, we need the current market cap and book value. From the report and current data:

  • Number of Ordinary Shares = 666,264,831
  • Price per Share (PSO – 2025-03-14) = $16.46 = £13.17 (using a conversion rate of 1.25 USD/GBP)
  • Market Cap = 666,264,831 * £13.17 = £8,775.51m
  • Total Equity = £4,053m
  • Sales = £3,552m
  • Operating Profit = £541m
  • Depreciation and Amortization = £77m + £117m + £41m + £291m = £526m
  • EBITDA = £541m + £526m = £1,067m

Price-to-Earnings Ratio (P/E)

  • Metric: Market Cap / Profit for the year = £8,775.51m / £435m = 20.17
  • Trend: To determine the trend, we would need the P/E ratio from the previous comparable period, which is not provided in the filing.
  • Industry: A P/E ratio of 20.17 is within the range of educational publishers and service companies.

Price-to-Book Ratio (P/B)

  • Metric: Market Cap / Total Equity = £8,775.51m / £4,053m = 2.17
  • Trend: To determine the trend, we would need the P/B ratio from the previous comparable period, which is not provided in the filing.
  • Industry: A P/B ratio of 2.17 is within the range of educational publishers and service companies.

Price-to-Sales Ratio (P/S)

  • Metric: Market Cap / Sales = £8,775.51m / £3,552m = 2.47
  • Trend: To determine the trend, we would need the P/S ratio from the previous comparable period, which is not provided in the filing.
  • Industry: A P/S ratio of 2.47 is within the range of educational publishers and service companies.

Enterprise Value to EBITDA (EV/EBITDA)

  • Metric: (Market Cap + Net Debt) / EBITDA = (£8,775.51m + £853m) / £1,067m = 9.02
  • Trend: To determine the trend, we would need the EV/EBITDA ratio from the previous comparable period, which is not provided in the filing.
  • Industry: An EV/EBITDA ratio of 9.02 is within the range of educational publishers and service companies.

Growth Rates

Revenue Growth

  • Metric: (£3,552m – £3,674m) / £3,674m = -0.0332 or -3.32%
  • Trend: N/A
  • Industry: N/A

Net Income Growth

  • Metric: (£435m – £380m) / £380m = 0.1447 or 14.47%
  • Trend: N/A
  • Industry: N/A

EPS Growth

  • Metric: (64.5p – 53.1p) / 53.1p = 0.2147 or 21.47%
  • Trend: N/A
  • Industry: N/A

Other Relevant Metrics

Key Performance Indicators (KPIs)

The company presents several KPIs, including:

  • **Virtual Learning US student enrolments:** Decreased from 107,000 in 2023 to 98,000 in 2024. This decline is a concern, although the company expects a return to growth in H2 2025.
  • **Pearson VUE test volumes:** Increased from 15.4m in 2023 to 16.4m in 2024. This growth is a positive indicator of the strength of the Assessment & Qualifications business.
  • **Credly enterprise customer net retention rate:** Decreased from 93% in 2023 to 88% in 2024. This decline is a concern, as customer retention is crucial for recurring revenue.
  • **Greenhouse gas (GHG) emissions reduction:** Reduced by 5.3% (location-based) since 2023. This reduction demonstrates the company’s commitment to sustainability.

Strategic Partnerships

Pearson has formed strategic partnerships with ServiceNow, Degreed, Microsoft, and AWS. These partnerships are aimed at expanding the company’s enterprise learning and skills offerings and leveraging AI to enhance learning experiences. The success of these partnerships will be crucial for driving future growth in the enterprise market.

Education Bond

Pearson launched a £350m education bond to finance initiatives aligned with UN SDG 4 (Quality education). The proceeds will be used to support underserved learners and communities. This initiative demonstrates the company’s commitment to social impact and responsible business practices.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️