Publishing giant Pearson continues to expect growth in sales and operating profits this year, despite markets stubbornly refusing to show many signs of improvement.
The Financial Times and Penguin books publisher said sales increased by 11% at constant exchange rates to £1.16bn in the first three months of the year. The underlying sales increase was 3% while what Pearson calls the headline increase was 12%. The growth was in line with market expectations.
"Though the external environment remains challenging and we are yet to see signs of improvement, we continue to expect Pearson to achieve growth in sales and operating profits for the year as a whole," the group's interim management statement said.
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Pearson's profits are normally heavily weighted to the second half and this year the group expects to see a decline in first half operating profits. It attributed this to the phasing of revenues, organic investment and restructuring, and the sale of its stake in FTSE International.
Net debt increased during the first quarter by £206m to £705m, level with the first quarter of 2011, as a result of the normal seasonal build-up of working capital ahead of the group's key selling periods in the education sector, although acquisition spend has also added to the debt build up. Pearson said it has head-room of around £1bn available to invest in bolt-on acquisitions.
The group's Education business has made a good start to the year, despite insipid demand from the US education market. Pearson said its strong position in the US education market and the rapid growth in its digital and services business is enabling it to hold its own in this market.
The International Education is growing well, particularly in developing markets and helped by recent acquisitions and sustained organic investment. The professional testing and publishing businesses are also performing well but Pearson's UK training business has been adversely affected, as expected, by change in government funding policy related to apprenticeships.
On the publications side, the Financial Times and Mergermarket are showing good sales growth, Pearson said, even if the advertising market remains subdued.
Shareholders hoping for a pick-up at Penguin, the book publishing division, will only be partially comforted that Pearson expects Penguin to perform in line with its peers this year.
The group is girding its loins for a battle with the US government over allegations over price fixing in the electronic book (ebook) market.
John Makinson, chairman and Chief Executive Officer of Penguin, sent an e-mail to UK technology web site The Register earlier this month saying the group is fully prepared to take its case to court.
"A responsible company does not choose a path of litigation with US Government agencies without carefully weighing the implications of that course of action," he told The Register. "Nonetheless, countless hours discussing this issue with colleagues here at Penguin, as well as with our parent company, Pearson plc, have not led any of us to the view that we should settle this matter," he added.
Penguin has Apple in its corner, as the iTunes operator is keen to compete with Amazon in the ebook market. Apple is not by nature one for discounts - quite the opposite, in fact - and so was more than happy to allow five publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) to set the prices at which their iPad-ready ebooks are sold (so long as Apple gets its 30% cut).
The DoJ said that Apple's adoption of the so-called "agency model", where publishers set the prices rather than the retailer, has opened the way for the publishers to collude on prices, but Apple denies this has been happening. Three publishers - Hachette, HarperCollins and Simon & Schuster - have already settled with the DoJ over allegations of price fixing.
Makinson claimed that Penguin is the only book publisher not to have discussions with the US Department of Justice (DoJ) about a possible settlement.
As a side-note, Amazon.com's first quarter results on Thursday night came in well ahead of analysts' expectations, on the back of strong demand for digital content, which includes ebooks.
Broker comment"Organic growth in the first quarter was at 3%, trending ahead of our full-year expectations of 1% growth, but most of Pearson's businesses are heavily skewed to the second half [H1] (2011 H1/H2 profits: 22%/78%), limiting the relevance of Q1 [first quarter] trends," Nomura Securities noted.
"Pearson does not yet commit to EPS [earnings per share] growth, partly owing to the sale in FY 11 [fiscal 2011] of the 50% stake in the FTSE International business," the broker added.
Nomura has a "reduce" rating on Pearson with a price target of 1,200p.
JH
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