Pearson Expects Strong 2008 Earnings

Iowa City Office Contributes to Company's Education Division

Kathy Sandler Wall Street Journal

LONDON -- Pearson PLC, which publishes textbooks, Penguin books and the Financial Times newspaper, Monday said it has largely bucked the economic downturn so far and its 2008 earnings will beat market expectations.

Boosted by a lower tax rate and sterling's fall against the dollar, the company expects earnings per share to be about 20% higher in 2008 than the 46.7 pence (68 U.S. cents) it posted for 2007, ahead of analyst expectations.

Pearson said it saw difficult conditions in some markets, including its school-publishing operations in the U.S. and advertising at the FT, but all units achieved or exceeded its own forecasts for 2008.

Looking ahead to results for 2009, the company said it expects "to prove durable once again thanks to the strength and breadth of our education business, Penguin's consistent publishing performance and the FT Group's shift towards subscription and content revenues."

The company's education business has been under the spotlight lately amid concerns about the impact of a cut in U.S. education budgets. Pearson supplies textbooks and educational-instruction tools, including online learning and assessment, to U.S. schools and colleges. The concerns were compounded by Pearson's educational-publishing rival McGraw-Hill Cos. reporting an expected drop of 10% to 15% in elementary- and high-school textbook sales in 2009.

Still, Pearson said Monday that results at its educational division came in ahead of expectations last year, with budgetary pressure on its U.S. school-publishing operations more than offset by good growth in its testing business and strength in U.S. higher education and international education.

Numis Securities said Pearson is better-placed to outperform its peers in the U.S. educational sector, because McGraw-Hill is grappling with turning around its Standard & Poor's division, while Houghton Mifflin Cos., another competitor, is hamstrung by high debt.

Pearson's resilience in the face of a global media slump reflects its relatively small exposure to advertising, with only its FT operations being affected by the advertising downturn.

Despite the ad slowdown in the fourth quarter, Pearson said its FT unit has produced good sales and profit growth. The company has been diversifying its FT business away from the cyclical constraints of advertising for some years: About 30% of the unit's sales now come from advertising, down from more than half in 2000. Instead, Pearson has shifted the focus at FT toward subscription and content revenue -- predominantly circulation -- which, though it has fallen, has held up well compared with U.K. national-newspaper peers.

The company raised the weekday price of the FT to £1.80 ($2.64) from £1.50 in November, which may have helped maintain revenue despite falling circulation.

Pearson is mindful of the economic climate and has taken measures to reduce costs, including cutting 80 jobs at the FT and implementing a companywide pay freeze for employees earning more than £30,000 a year.

These measures reflect an industrywide focus on cutting costs amid uncertainty about the duration and depth of the economic downturn.

Pearson's book-publishing unit Penguin performed in line with expectations amid a slower-than-usual Christmas season for the overall book market.