Pearson plunges as digital switch forces new profit warning – CNBC

Education group Pearson lost almost a third of its market value on Wednesday after it ditched its profit and dividend forecasts in a battle to respond to a shift to digital that has already hit the music and newspaper industries.

The world’s biggest education company, which traditionally makes most of its profit from textbooks and testing, is facing structural turmoil as customers turn to cheaper digital alternatives, or choose to rent instead of buy content.

The greatest change is being felt in North America, its biggest market, where a fall in college enrollment numbers due to an improving economy have compounded the digital switch.

Shares in the 173-year-old British company fell 30 percent on Wednesday, on course for their worst day ever and wiping off 1.9 billion pounds ($2.3 billion), after the group said it could no longer put a figure on its 2017 dividend, piling pressure on CEO John Fallon.

The firm, which said its 2017 operating profit could come in as much as 19 percent below forecasts and scrapped its 2018 guidance altogether, said it would seek to sell its stake in Penguin Random House to protect the balance sheet.

It also plans to move more aggressively into ebooks and the book rental market and will spend 50 million pounds on technology.

Fallon, a 20-year Pearson veteran who has been CEO since 2013, said he accepted responsibility for failing to predict the changes in the market but that his job now was to prepare the company for the rapid move to digital.

“I am accountable and I fully accept that accountability … but I am also accountable for leading the company through what is a far more difficult period than anyone could have imagined,” he said.

“The education sector is going through an unprecedented period of change and volatility. Our higher education business declined further and faster than expected in 2016.”

Pearson, which sold the Financial Times newspaper and its stake in The Economist magazine in 2015 to focus on education, has been hit by a recovering U.S. economy which has led to more people entering employment, hitting college enrollment numbers.

North America accounts for almost two-thirds of group sales.

Students have also increasingly been using second-hand books and renting courseware, leading to a 30 percent decline in net revenues in the North American higher education courseware market in the final quarter of 2016.

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