Financial Report Shows Pearson Moving Digital

Pearson, one of the world’s largest textbook publishers, generated one-third of its sales from digital products and services, the company announced in its 2011 financial report on Monday.

Digital revenues were up 18 percent in 2011, totaling more than $3 billion. Overall, the company’s sales were up 6 percent, reaching $9.3 billion, and its operating profits were up 12 percent, to about $1.5 billion. Earnings per share also increased 12 percent. Pearson’s stock (NYSE:PSO) closed Monday at $19.02 per share, slightly below its year-to-date high of $19.80.

Nearly half of Pearson’s business is in North American education, sales and profits for which remained mostly stagnant this year. But the company’s shift to digital can still be seen in its approach to education, where it now offers a wide range of electronic services, beyond its typical bedrock of print textbooks and testing.

The company offers learning-management systems for teachers to track and oversee students, software that individualizes student instruction (through its $230 million purchase of Schoolnet last year) and, in its highest-profile recent move, electronic, interactive versions of its textbooks, through a partnership with Apple. Pearson also acquired online schools operator Connections Education for about $400 million last year.

That enterprise is available in 21 states and enrolls 33,200 students, a 43 percent increase from last year.

“We are now a digital and services company,” Marjorie Scardino, Pearson’s CEO, told investment analysts on a conference call Monday morning.

“I wouldn’t be surprised if in not so many years from now, Pearson is a company that delivers most of what it does on screens,” she said.

Scardino said Pearson’s digital offerings will help it shed major inventory costs, develop a large bank of consumer data, and forgo substantial third-party spending by selling directly to consumers.

But while Pearson believes its increasingly digital position is the best for its future, the stagnancy in domestic education sales suggests the marketplace isn’t shifting quite as quickly.

A major hindrance in American K-12 curriculum and assessment sales is the sluggish spending at the state and district levels, specifically in advance of the Common Core State Standards, said Will Ethridge, the chief executive of North American education for Pearson. Pearson executives suggested business would pick up in 2013 and 2014, when states begin adopting the standards, and that Pearson is well-positioned for that shift. Earlier this year, the company won a large contract to develop a technology-readiness tool for states to use as they transition to online Common Core assessments.

The opportunities for education publishers are fading as well. The U.S. textbook market is down 9 percent, and money spent on new adoptions of textbooks dropped to $650 million from $800 million the year before, according to the Association of American Publishers.

Perhaps as a response to stagnancy in the company’s largest market, Pearson is rapidly expanding beyond the United States, and into developing countries. Pearson’s international education sales grew 15 percent last year, to $2.25 billion. (All financial figures have been converted from British pounds to American dollars. Pearson is headquartered in London.)

Eleven percent of Pearson’s total sales are now in developing markets, and the company made major acquisitions in Africa, Brazil, China, and the Middle East last year.

Overall, the trends signal Pearson’s shift to a technology company, just as the education market shifts itself more toward digital learning. Executives said they expect more than half of the company’s sales to be digital in 2012. More notably, however, is the shift away from textbooks and curriculum to a more comprehensive learning experience, including, through Connections Education, operating its own schools. That, of course, will likely heighten the scrutiny Pearson, a publicly traded company, is given by lawmakers and educators.

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