Pearson 2015 half-year results

Pearson 2015 Interim results (unaudited)

FINANCIAL HIGHLIGHTS

  • Sales up 1% at CER to £2.2bn reflecting growth in North America, Brazil and China, and strength in digital and services, including Connections Education and Pearson On Line Services. This was partly offset by a smaller new textbook adoption market in US schools and the phasing of school textbook expenditure and lower college enrolments in South Africa.
  • Deferred revenue from continuing operations up 3% at CER to more than £750m as a result of further good progress in our digital and services businesses partly offset by lower deferred revenue in UK testing and in South Africa, due to lower college enrolments.
  • Adjusted operating profit from continuing operations down 4% at CER to £72m (2014: £73m). Sales growth, lower net restructuring charges, and growth in the contribution from Penguin Random House was offset by revenue mix, shared services costs related to the Penguin de-merger, and a contract termination charge arising from the transition of our three Saudi Arabian Colleges of Excellence to new providers.
  • Adjusted EPS of 4.4p (2014: 4.7p) primarily reflecting the absence of Mergermarket.
  • Dividend raised 6% to 18p.
  • On 23 July, Pearson announced its intention to sell FT Group to Nikkei Inc. for a gross consideration of £844m.

2015 FULL YEAR OUTLOOK

  • At our preliminary results on 27 February 2015 we stated that we expect to report adjusted earnings per share of between 75p and 80p in 2015, on the basis of ownership of PowerSchool for all of 2015 and based on exchange rates as at 21 January 2015. This guidance remains unchanged.
  • On 17 June 2015 we announced the sale of PowerSchool to Vista Equity Partners for $350m, which will reduce expected earnings per share by approximately 1p. If current exchange rates persist until the end of 2015 it would reduce earnings per share by approximately 2p.

STRATEGIC OUTLOOK

  • Pearson’s strategy centres on a significant and exciting long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education.
  • We can meet this demand by accelerating our shift to digital, services and to fast-growing economies, and committing to deliver measurably improved learning outcomes (efficacy).
  • We are investing in courseware, assessment and qualifications, managed services, and schools and colleges. We are organising around a smaller number of global products and platforms, built around a single, world-class infrastructure and common systems and processes.
  • We believe cyclical pressures will ease as curriculum change is implemented in the US and UK and US college enrolments stabilise and, in due course, return to growth. While UK policy pressures are easing as expected, the US policy environment remains uncertain.
  • This strategy will enable us to empower more people to progress in their lives through learning. It also provides Pearson with a larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns in 2016 and longer term.

John Fallon, chief executive said:

"Overall, we’re competing well, enabling us to reaffirm our full year guidance and increase the interim dividend. The new education products and services we’re developing which will enable far more people of all ages to discover the joy of learning and progress in their careers. We believe the returns on the significant investments we are making to achieve this goal will be substantial for students, society and our shareholders."

FINANCIAL SUMMARY

£ millions Half-year
2015
Half-year
2014
Headline
growth
CER
growth
Underlying
growth
Business performance          
Sales 2,157 2,047 5% 1% 1%
Adjusted operating profit* 72 73 (1)% (4)% (5)%
Adjusted earnings per share 4.4p 4.7p (6)%    
Operating cash flow (333) (254) (31)%    
Free cash flow (424) (328) (29)%    
Net debt (2,289) (2,028) (13)%    
Statutory results          
Sales 2,157 2,047 5%    
Operating loss (112) (37) n/a    
Loss before tax (115) (36) n/a    
Basic earnings per share (9.7)p 28.0p n/a    
Cash generated in operations (275) (212) (30)%    
Dividend per share 18.0p 17.0p 6%    

* Excluding Mergermarket
Throughout this announcement:
a) Growth rates are stated on a constant exchange rate (CER) basis unless otherwise stated. Where quoted, underlying growth rates exclude both currency movements and portfolio changes. Unless otherwise stated, sales exclude Mergermarket while total adjusted operating profits include Mergermarket. Continuing operations exclude Mergermarket.
b) The ‘business performance’ measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the attached condensed consolidated financial statements 2, 3, 4, 5, 7 and 17.
 

DIVISIONAL ANALYSIS – GEOGRAPHY  

£ millions 2015 2014 Headline
growth
CER
growth
Underlying
growth
Sales          
North America 1,301
1,164 12% 3% 3%
Core 515
548
(6%)
(5)%
(5)%
Growth 341
335
2%
1%
0%
Continuing operations 2,157
2,047
5%
1%
1%
Mergermarket -
9
n/a
n/a n/a
Total sales 2,157
2,056
n/a
n/a n/a
Adjusted operating profit          
North America 42
36
17%
0%
0%
Core 23
13
77%
77% 77%
Growth (17)
6
n/a
n/a n/a
Penguin Random House 24
18
33%
28%
28%
Adjusted operating profit from
continuing operations
72
73
(1)%
(4)%
(5)%
Mergermarket -
2
n/a n/a n/a
Total adjusted operating profit 72
75
(4)% (7)% (5)%


DIVISIONAL ANALYSIS – LINE OF BUSINESS
 

£ millions 2015 2014 Headline
growth
CER
growth
Underlying
growth
Sales          
School 987 939
5%
0%
0%
Higher Education 617
589
5%
(2)%
(2)%
Professional 553
519
7% 4%
3%
Continuing operations 2,157 2,047
5%
1%
1%
Mergermarket -
9
n/a n/a n/a
Total sales 2,157
2,056
n/a n/a n/a
Adjusted operating profit          
School 26
36
(28)%
(22)% (22)%
Higher Education (16)
(10)
(60)%
(70)%
(70)%
Professional 38
29
31%
24%
20%
Penguin Random House 24
18
33%
28%
28%
Adjusted operating profit from
continuing operations
72
73
(1)%
(4)%
(5)%
Mergermarket -
2
n/a n/a n/a
Total adjusted operating profit 72
75
(4)% (7)% (5)%


OUTLOOK

In 2014, we completed the major restructuring and product investment programme initiated in 2013, designed to accelerate Pearson’s shift towards significant growth opportunities in digital, services and fast-growing economies. We believe this will provide Pearson with a significantly larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns. In 2015, we are returning to more normal levels of restructuring expenditure.

At our preliminary results on 27 February 2015 we stated that we expect to report adjusted earnings per share of between 75p and 80p in 2015, on the basis of ownership of PowerSchool for all of 2015 and based on exchange rates as at 21 January 2015. This guidance remains unchanged.

On 17 June 2015 we announced the sale of PowerSchool to Vista Equity Partners for $350m, which will reduce expected earnings per share by approximately 1p. If current exchange rates persist until the end of 2015 it would reduce earnings per share by approximately 2p.

The major factors behind our guidance are as follows:

TRADING CONDITIONS

We expect cyclical and UK policy related factors to stabilise in 2015. The US policy environment remains uncertain.

In North America, our largest market, we expect growth in online higher education services and VUE and, with more stable college enrolments and a slower new edition year, courseware to be broadly level. In School, while the possibility of further policy related disruption remains, we expect greater stability in courseware and assessments with growth in virtual schools.

In our Core markets (which include the UK, Italy and Australia), we expect trading conditions to stabilise in the UK, growth in inside services to broadly offset declines in courseware in Australia, and sustained share in Italy following share gains in 2014. We expect the Financial Times to continue to benefit from, and invest in, its digital transition.

In our Growth markets (which include Brazil, China, India and South Africa), we expect good growth in China in our English Language Learning adult and test preparation businesses and continued stability in courseware; in Brazil, we expect a better year in our sistemas business and good growth in our English Language Learning franchises; and in South Africa we expect modest declines in the school courseware and lower enrolments in higher education.

PORTFOLIO CHANGES

We benefited for many years from the synergies created by integrating Penguin into our shared services operations. Following the transition of Penguin from Pearson services during 2014, some shared services costs remain with Pearson without associated revenues. We estimate these shared services costs at approximately £30m. We can reduce this somewhat over time which will be captured in our normal levels of restructuring.

The disposal of PowerSchool to Vista Equity Partners for $350m was announced on 17 June 2015. In 2014, PowerSchool contributed $97m of revenues and $20m of operating income. Our guidance at the beginning of 2015 assumed ownership of PowerSchool for all of 2015. As a result, the disposal reduces our guidance earnings per share range by approximately 1p.

Pearson has announced the disposal of FT Group to Nikkei Inc. for a gross consideration of £844m. In 2014, FT Group contributed £334m of sales and £24m of adjusted operating income to Pearson. The agreement does not include FT Group’s London property at One Southwark Bridge and Pearson’s 50% stake in The Economist Group. The transaction is subject to a number of regulatory approvals and is expected to close during the fourth quarter of 2015. Our guidance assumes ownership of FT Group for all of 2015.

CURRENCY MOVEMENTS

In 2014, Pearson generated approximately 60% of its sales in the US, 6% in the Euro zone, 6% in Greater China , 3% in Brazil, 2% in Canada, 2% in Australia, 2% in South Africa and 1% in India. Based on 21 January 2015 guidance exchange rates, the benefit from the weakening of Sterling against the US Dollar on our reported operating income will be partly offset by the strength of Sterling against a range of non-US Dollar currencies, including: the Euro, Australian Dollar and certain emerging markets currencies; and a higher interest charge as Sterling weakness against the US Dollar increases the Sterling value of our US Dollar denominated debt and interest payments. Since 21 January 2015, the US dollar and Brazilian Real, in particular, have weakened relative to Sterling. If current exchange rates persist until the end of 2015 it would reduce our 21 January 2015 guidance earnings per share range by approximately 2p.

RESTRUCTURING

We will benefit from the absence of £44m of exceptional net restructuring charges expensed in 2014 and we still expect to generate £45m of incremental cost savings in 2015.

These benefits will be partly offset by normal levels of net restructuring of approximately £30m in 2015.

INTEREST AND TAX

We expect our interest charge to be higher than 2014, reflecting higher average net debt levels, primarily as a result of the strength of the US Dollar against Sterling. We expect a tax rate of approximately 17% on our total profit before tax (which includes the post-tax contribution from Penguin Random House).

APPOINTMENT OF CHIEF FINANCIAL OFFICER

We announced on 27 February 2015 the appointment of Coram Williams as Pearson’s new chief financial officer. Coram joined Pearson as CFO designate on July 1st, and will succeed Robin Freestone as CFO on August 1st, when he will also replace Robin on the Pearson board as an executive director. Pearson announced on October 24th 2014 that Robin Freestone would stand down before the end of 2015.

FOR MORE INFORMATION

Simon Mays-Smith / Brendan O’Grady + 44 (0)20 7010 2310

Pearson’s results presentation for investors and analysts will be audiocast live today from 0900 (BST) and available for replay from 1200 (BST) via www.pearson.com. High resolution photographs for the media are available from our website www.pearson.com.

FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, the matters discussed in this statement include forward-looking statements. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing, anticipated costs savings and synergies and the execution of Pearson's strategy, are forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will occur in future. They are based on numerous assumptions regarding Pearson's present and future business strategies and the environment in which it will operate in the future. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including a number of factors outside Pearson's control. These include international, national and local conditions, as well as competition. They also include other risks detailed from time to time in Pearson's publicly-filed documents and you are advised to read, in particular, the risk factors set out in Pearson's latest annual report and accounts, which can be found on its website (www.pearson.com/investors). Any forward-looking statements speak only as of the date they are made, and Pearson gives no undertaking to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes to events, conditions or circumstances on which any such statement is based. No reliance should be placed on forward-looking statements.

GLOBAL EDUCATION STRATEGY

Pearson’s purpose is to empower people to progress in their lives through learning. We put the learner at the heart of everything we do. The bigger Pearson’s social impact – in improving access to good quality education and ensuring that translates into meaningful learning outcomes for far more people – the more we can create a faster growing and more profitable company, and do so in a sustainable manner.

Our strategy centres on a significant and exciting long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education. To prosper in career and college, all young people need to leave school literate and numerate, with a sound understanding in science, technology and the liberal arts and able to apply that knowledge to solve real world problems. They also need to be proficient in the kinds of less tangible skills that will help them to succeed in the workplace – critical thinking, adaptability, team-working, and digital fluency. They need the grit, resilience and determination to persevere and succeed and, most of all, they need the capacity to carry on learning throughout their lives. These are all things that can be taught.

The challenge of better preparing people for their world is substantial. One in five adults lack basic written communication skills, and 121 million children do not attend school. Many millions more are in education, but not learning effectively. For education to work, it needs to not only provide access, but ensure progress. Against this backdrop there are fragmented, localised and siloed approaches; conflicting opinions on teaching and learning, and education policy continually adapting to changes in political office.

Pearson stands at the intersection of new technology (with its ability to engage, personalise, diagnose and scale) and new, more effective, ways of teaching. This allows us to develop products and services that enable the benefits of richer, deeper learning to be more widely felt. Increasingly, we will be able to demonstrate our impact on learning outcomes and to implement at scale around the world. We still have much to do to be able to play our part in meeting the global demand for education, and in 2015 five priorities will guide our work:

  1. A business model focused on helping more people achieve better learning outcomes: efficacy is now at the centre of our business model and a major part of how we create value.
  2. New digital products: launching new digital products to meet demand for better learning outcomes.
  3. A more focused company: more modular and scalable products, deployed on a smaller number of global platforms.
  4. A more consistently high performing culture: a series of actions, including changing how we recruit, appraise and reward our employees.
  5. A strong and trusted brand: build Pearson as a global education brand, focused on educational impact and learning outcomes, and being open and transparent in holding ourselves to account in achieving these goals.

Our strategy will enable us to empower more people to progress in their lives through learning. It also provides Pearson with a larger market opportunity, a sharper focus on the fastest growing markets and stronger financial returns in 2015 and beyond.

FINANCIAL OVERVIEW

Profit & loss statement. In the first half of 2015, Pearson’s sales increased by £110m in headline terms to £2.2bn primarily due to the depreciation of sterling against the dollar. Adjusted headline operating profit from continuing operations was broadly level at £72m (2014: £73m). Sales growth, lower net restructuring charges, and growth in the contribution from Penguin Random House was offset by revenue mix, shared services costs related to the Penguin de-merger, a contract termination charge arising from the transition of our three Saudi Arabian Colleges of Excellence to new providers.

Currency movements, primarily from the depreciation of Sterling against the US Dollar during the period, increased sales by £96m and operating profits by £2m.

At constant exchange rates (ie stripping out the impact of those currency movements), our sales grew by 1% and adjusted operating profit declined by 4%.

The net effect of acquisitions and disposals impacted sales by £3m and operating profits by £1m.

Stripping out the impact of portfolio changes and currency movements, revenues were up 1% in underlying terms while adjusted operating profit from continuing operations declined by 5%.

Statutory results. Our statutory results showed an operating loss of £112m (£37m loss in 2014). Statutory loss before tax was £115m (£36m in 2014). Statutory earnings for the period show a £306m decrease in profits to a loss of £79m (£227m profit in 2014) due to a £70m balance sheet write down in 2015 and a net profit of £196m on the sale of Mergermarket and the benefit of a £56m adjustment to the Penguin disposal primarily relating to pensions in 2014. On completion of the disposal of PowerSchool in the third quarter of 2015, we expect to record a net gain on sale of approximately $50m. Ahead of completion, we have recognised a £70m balance sheet write down related to the disposal of PowerSchool in our first half results, which will be charged against the Powerschool disposal at completion. This write down reflects the reduced market opportunity for software (such as Pearson System of Courses and Schoolnet) which was to be integrated with PowerSchool and the recognition that adoption of such software in US Schools is now unlikely to occur at the rate originally envisaged.

Balance sheet. Our net debt, which reaches a seasonal peak around the half-year and is mainly dollar-denominated, was £2,289m (£2,028m in 2014) at 30 June. The year-on-year increase reflects foreign exchange movements, our seasonal peak in working capital and capital investments in technology systems.

Dividend. The board has declared an interim dividend of 18p per share, a 6% increase on 2014.

NORTH AMERICA (60% of group revenues)

Revenues grew 12% in headline terms, due to the depreciation of Sterling against the US Dollar, and increased by 3% at both CER and in underlying terms driven by revenue growth in Higher Education On Line Services, Connections Education, school assessment and VUE, partially offset by declines in school courseware, where a strong competitive performance was offset by a smaller school adoptions market. Adjusted operating profits rose 17% in headline terms due to currency movements, but were flat at both CER and in underlying terms on a strong contribution from VUE and the profit on sale of a list, offset by the impact of a smaller adoptions market in K12 Courseware.

School

In School, good growth in Connections Education and Assessments was offset by the impact of a smaller textbook adoptions market in K12 Courseware.

Connections Education, our virtual school business, served nearly 63,000 Full Time Equivalent students during June 2015 through full-time virtual and blended programmes, up nearly 15% from 2014, boosted by good organic growth and the launch of three new full-time virtual public schools in 2014. A new virtual school, North Carolina Connections Academy, was approved by the North Carolina State Board of Education. In its annual Parent Satisfaction Survey 93% of parents of students enrolled in full-time online partner schools "recommend" Connections to other families and gave Connections a Net Promoter Score of 64% up 5% on last year.

In courseware, we won the largest share of new adoption expenditure with an estimated 31% (2014: 25%) of new adoptions competed for, or 29% (2014: 25%) of the total new adoption market of $685m in 2015 (2014: $910m), led by a strong performance in Grades K-6 Social Studies in Texas and Indiana and in Grades K-6 Science in Oklahoma.

iLit, our digital reading intervention programme, has been expanded into a suite of products and is growing strongly in 2015. iLit research studies show that students gain two or more years of reading growth in a year using this tablet based programme (http://pear.sn/PErhf).

In State and National Assessments, high-stakes online test volumes grew strongly, up 170% on the same period in 2014 to 24.4 million, as customers transitioned to computer based testing. Paper based high stakes test volumes declined 6% to 22.8 million due to the growth of computer based testing. Pearson successfully delivered English Language Arts and Math PARCC assessments to over 5 million students across 10 states this Spring. ACT Aspire delivered Common Core aligned college and career readiness assessments to 1.2 million students, up 200% on the same period in 2014.

Pearson signed a five year contract to supply operational processing services to The College Board for the SAT and PSAT assessments. We were awarded contracts to deliver the Indiana Statewide Test of Educational Progress (ISTEP); renewed the Puerto Rican Tests of Academic Achievement (PPAA) and parts of the assessments contract awarded by the Texas Education Agency; and extended our contracts to administer the Mississippi Science Test and Mississippi Subject Area Testing Program. We will cease to administer the majority of the current Texas STAAR contract in September 2015 and the Florida Comprehensive Assessment Test (FCAT) in the summer of 2016. The state of Ohio has decided to discontinue use of PARCC assessments in 2016 and return to its previous vendor.

Clinical Assessment grew strongly benefiting from continued growth of the fifth edition of the Wechsler Intelligence Scale for Children (WISC-V) and rapid growth in Q-interactive, Pearson's digital solution for Clinical assessment administration with continued strong growth in active users and test administrations.

Higher Education

In Higher Education, total US College enrolments were 1.7% lower in spring 2015 compared to spring 2014, with combined two-year public and four-year for-profit enrolments declining 4%, affected by rising employment rate and regulatory change affecting the for-profit and developmental learning sectors.

Pearson On Line Services, where we run fully online undergraduate and graduate learning programmes and earn certain revenues based on the success of the students and the institution, grew course enrolments 24% to over 134,000 compared to the first half of 2014, boosted by strong growth in Arizona State University Online where we renewed our partnership. We extended our collaboration with Maryville University to launch a new online MBA programme.

Courseware revenues fell modestly, despite market share gains. Our market share benefited from strong performance from key titles including Marieb, Human Anatomy & Physiology, Martin-Gay, Basic College Mathematics, Appling, Biochemistry 1e and Acemoglu, Laibson and List, Principles of Economics 1e.

Global MyLab active users grew 5% to 5.5 million, with strength in English Language and Core Schools products. In North America, MyLab active user registrations grew 1% to 4.7 million with good growth in Science and Business & Economics offset by softness in developmental Mathematics. Lecturer generated case studies indicate that the use of MyLab programmes, as part of a broader course redesign, can support improvements in student test scores (http://pear.sn/IZxLE). REVEL titles increased from 9 at launch in 2014 to 45 with plans to reach 140 titles by year end. REVEL combines trusted content with interactive videos, quizzes, a mobile user interface, study tools, assignment calendar and performance dashboard. Pearson signed significant large-scale, enterprise adoptions of cross-discipline digital content, where content is purchased via an upfront course fee and integrated with university IT systems, with Fairleigh Dickinson University, National University, Algonquin College and the University of Missouri system.

We signed an expanded strategic partnership agreement with Southern New Hampshire University’s (SNHU) College of Online and Continuing Education (COCE). Pearson will support curriculum development, online tutoring, enterprise wide content and data integration, eBooks with a print-on-demand option and data and analytics services which will provide greater visibility into students’ achievement of learning outcomes.

The Charles A. Dana Center at The University of Texas at Austin is collaborating with Pearson to provide web-based course resources to Community Colleges across Texas that dramatically shorten the time it takes for students to earn college credit in mathematics as part of the New Mathways Project.

We partnered with Maricopa Corporate College to launch a complete catalogue of self-paced workforce education courses with the goal of rapidly expanding its offerings to help students gain local employment.

We are partnering with Broward College to launch new competency-based workforce certification pathways focused on IT and Healthcare. Pearson will support Broward’s strategy by providing 12 industry certifications with existing workforce education courseware, as well as curriculum development services to build new courses towards certification and the Acclaim badging platform.

Professional

At VUE, global test volumes grew 10% year on year to 7.4 million boosted by continued growth in IT, Professional certifications, and GED, with increased volumes from Microsoft Certified Professional (MCP) Program globally and from Professional clients such as National Council of State Boards of Nursing, Teacher Certifications for Evaluation Systems, and for National Council of Examiners for Engineering and Surveying.

CORE (24% of group revenues)

Revenues declined by 6% in headline terms and 5% at both CER and in underlying terms. In the UK, revenues declined as the business nears the end of a period of policy change in qualifications and due to the phasing of the purchase of new resources to support curriculum change in UK secondary schools; and due to declines in VUE and UK print revenues at the FT. In Italy, revenues grew well with growth in School, primarily due to timing, and in Wall Street English. In Australia, revenues declined, primarily due to phasing and challenging market conditions in Higher Education. Partner market revenues grew well driven by strength in Middle-East and Africa. Adjusted operating profit (excluding Mergermarket) increased by £10m to £23m, benefiting from restructuring taken over the last two years.

School

In the UK, qualifications have been impacted by government policy, where changes to accountability measures have led to a further decline in BTEC registrations. GCSE and GCE entries for summer 2015 grew modestly compared with 2014 resulting from increases in GCSE registrations in Sport, ICT and Business and strength in iGCSE entries.

We successfully delivered the National Curriculum Test for 2015, marking 4 million scripts and returning over 2 million results back to students, and successfully transitioned the marking of the test to an online only model.

More than 5,100 UK Schools now subscribe to at least one of the Bug Club services, our primary school blended reading programme, representing growth of nearly 15% in the last 12 months. During the last 6 months Bug Club schools have been migrated to the ActiveLearn Primary platform which supports all the Primary services, including Abacus, Wordsmith, Rapid Reading and Science Bug. There are over 1.4 million pupils, more than 9,000 schools and 124,000 teachers currently using a service on ActiveLearn Primary. In the UK, secondary courseware revenues declined, primarily due to phasing of purchases of new resources to support curriculum change.

Higher Education

In the UK, our courseware revenues declined, primarily due to lower volumes of students taking Higher National qualifications, partly offset by good growth in Higher Education enterprise partnership revenues. Enrolments at Pearson College are expected to grow 40% to 167 students.

In Australia, courseware revenues declined on lower demand for traditional textbooks. Our Australian University Partnerships business is progressing well, with our strategic partnership with Monash continuing to deliver strong results. We launched three courses in 2014, including the graduate diploma in Psychology, which is now one of Monash's largest postgraduate courses, and will be launching a further course in Data Science later in 2015. Griffith University, in partnership with Pearson, also successfully launched its first fully online MBA this year, with additional courses planned later in 2015.

Professional

At the Financial Times Group, global revenues grew slightly, with growth in digital content offset by declines in print content and advertising; and growth in North America offsetting declines in Europe.

The FT grew its global paid for circulation by 9% year on year to 737,000 across print and online. Digital users increased 14% year on year to almost 520,000, lifted by a new access model offering paid trials and now represent 70% of the FT’s total paying audience. The strong digital circulation growth offset continued declines in print content and advertising. The FT continues to take advertising market share globally.

Investment in product launches and enhancements is driving deeper engagement with readers. The new FirstFT morning newsletter has attracted the highest engagement level of any FT email, with subscribers reading 50% more content and increasing their visits to FT.com by more than a quarter. Chartbeat recently reported FT subscribers spend three times longer on FT.com when compared to visitors to other media sites.

The Pearson Test of English Academic (PTEA) performed well, gaining approval from the Australian Department of Immigration and Border Protection to administer a broad range of language tests linked to visa applications.

At VUE, we will cease to deliver our UK contract to administer the Driving Theory test for the DVSA in September 2016.

The contribution from The Economist Group was higher as growth in circulation, custom research and marketing services revenues offset declines in print advertising. Circulation at The Economist was 1.6m, with an increase of 57% in subscribers choosing digital packages. The daily Espresso app, launched at the end of 2014, has now been downloaded more than 800,000 times and in April the Group also launched The Economist Global Business Review - an English-Chinese smartphone app - its first bilingual product.

GROWTH (16% of group revenues)

Revenues rose 2% in headline terms, 1% at CER and were flat in underlying terms. In China, revenues grew well reflecting strong sales of new and premium services in our direct delivery English Language Learning businesses. In Brazil, revenues grew modestly with good growth in private sistemas and language schools partly offset by declines in government funded sistemas and language schools. In South Africa, revenues declined significantly with later phasing and a smaller textbook adoption cycle compared to 2013 and early 2014; and lower enrolments at CTI, primarily due a reduction in the number of qualified students graduating from high school, a shift to later course start dates and tightening consumer credit affecting re-enrolment rates.

Adjusted operating profit decreased £23m to a loss of £17m primarily reflecting a contract termination charge arising from the transition of our three Saudi Arabian Colleges of Excellence to new providers and weakness in South Africa, partly offset by growth in China and the benefits of restructuring and integration in Brazil.

School

In South Africa, textbook revenues declined significantly, primarily due to phasing, and while the size of the market in 2015 remains uncertain due to the second half phasing of purchasing, we expect to continue to perform well competitively during the key selling months.

In Brazil, sistemas revenues grew well with strong growth in private sistemas partly offset by declines in our public sistema (NAME) following the cancellation of a large contract as a result of government spending cuts. Overall sistema enrolments fell 9% to 453,000 with declines in NAME partly offset by growth in our three private sistemas.

In India, enrolments at our managed schools grew 6% to 25,000 students and we launched a pilot in approximately 50 schools of MyPedia, an inside service ‘sistema’ solution for schools in India comprising print and digital content, assessments and academic support services. Courseware revenues grew strongly.

Higher Education

In South Africa, after strong growth over a number of years, student enrolments at CTI/MGI universities fell by 16% to 11,300 driven by a 13% decline in qualified graduating high school students, a shift to later course start dates and tightening consumer credit affecting re-enrolment rates.

In Mexico, our fully accredited online university partnership, UTEL, increased the number of students enrolled by 43% to nearly 11,000.

In the Middle East, our three-year partnership with Taibah University in Saudi Arabia, to enable its transformation to a fully blended learning model, is progressing well. We signed an agreement with the Preparatory Year Deanship at Um Al Qura University (PYP-UQU) to provide online learning and assessment technology, including 13,000 MyMathLab, MyITLab and MasteringPhysics licences and ongoing staff training from Pearson’s technical experts. We withdrew from an agreement to run three Saudi Colleges of Excellence, with the colleges transitioning to new providers from 30 June 2015. This resulted in a termination charge.

Professional

In Pearson English, good growth in direct delivery revenue in China and in sales of English Language Teaching (ELT) products was partly offset by the impact of reduced government spending on Grupo Multi in Brazil.

In China, Wall Street English (WSE) achieved good revenue growth reflecting success in the premium segment with strong growth in VIP branded offerings. Enrolments were flat at 65,000, with new centres scheduled to open in the second half with the launch of our New Student Experience. Global Education achieved good revenue growth as the market shifted to more intensive premium courses with smaller class sizes, which resulted in a decline in enrolments.

New MyEnglishLab products, MyTOEFLLab and the second edition of MyIELTSLab successfully launched in China in WSE and Global Education. Global student registrations for MyEnglishLab and other ELT courseware grew 21% to 341,000.

At Grupo Multi in Brazil, growth in Wizard, our consumer facing franchised English language learning business, was more than offset by declines in government orders driven by public spending cuts.

PENGUIN RANDOM HOUSE

Pearson owns 47% of Penguin Random House, the first truly global consumer book publishing company.

Penguin Random House has performed well in the first half of the year, driven by the strength of multi-geographic Adult bestsellers including The Girl on the Train and Grey, which sold over 4 million and 3 million copies, respectively; and the ongoing robust performance from its Children’s publishing programmes across its territories.

The US business published 306 New York Times print and ebook bestsellers in H1 2015 (2014 H1: 430, based on a broader New York Times title count than 2015). The division benefited from the multi-million copy successes of the Adult debut novel The Girl on the Train by Paula Hawkins, E L James’s Grey, and her Fifty Shades trilogy. Children’s authors who continued to enjoy outstanding sales in H1 include John Green, Dr. Seuss, James Dashner, together with tie-in titles from Disney’s Frozen film. Additional notable Adult titles include The Life-Changing Magic of Tidying Up by Marie Kondo, Dead Wake by Erik Larson, Coben’s The Stranger, Brooks’s The Road to Character, Sanford’s Gathering Prey, and the paperback reprints of Martin’s Ice and Fire series and Child’s Personal. The UK business published titles which made 471 appearances (without Children’s and Manuals) on the Sunday Times bestseller lists (2014 H1: 471). The division benefited from sales of more than one million copies each of The Girl on the Train and Grey, and the great continuing demand for John Green and Jeff Kinney’s Diary of a Wimpy Kid titles. Other key Adult titles included Harper Lee’s To Kill a Mockingbird and fiction and nonfiction by Child, Pratchett, and Berry.

The Penguin Random House publishing line-up for the second half of 2015 includes, in the UK, Go Set A Watchman by Harper Lee, in the US, the newly discovered What Pet Should I Get by Dr. Seuss, multi-volume tie-ins to the year-end theatrical film release Star Wars: The Force Awakens, and new fiction and nonfiction by Lee Child, Elvis Costello, Janet Evanovich, Giada De Laurentiis, John Grisham, Elizabeth Gilbert, Jeff Kinney, George R.R. Martin, David Mitchell, Jamie Oliver, Orhan Pamuk, James Patterson, Nora Roberts, Salman Rushdie, Patti Smith, Danielle Steel, and Zoella.

The integration of the two businesses is progressing well, with increased integration activity in the first half of 2015, and is on track to deliver net benefits in 2015 and beyond. Organisational alignment continues, system integration and warehouse consolidation is completed in the US, and in the UK and Australia it is progressing well, as is the integration of Santillana with Grupo Editorial Penguin Random House in Spain and Latin America.

FINANCIAL REVIEW

Operating result

Due to seasonal bias in some of the Group’s businesses, Pearson makes a higher proportion of its sales and the majority of its profits in the second half of the year.

On a headline basis, sales from continuing operations for the six months to 30 June 2015 increased by £110m or 5% from £2,047m for the first six months of 2014 to £2,157m for the equivalent period in 2015. Total adjusted operating profit decreased by £3m or 4% from £75m in the first six months of 2014 to £72m in 2015.

On an underlying basis, sales from continuing operations for the first six months increased by 1% in 2015 compared to 2014 and total adjusted operating profit was down 5%. Our underlying measures exclude the effects of exchange and portfolio changes arising from acquisitions and disposals. In 2015, currency movements increased sales by £96m and increased adjusted operating profit by £2m. Portfolio changes increased sales by £3m and decreased adjusted operating profit by £1m.

Our portfolio change is calculated by taking account of the additional contribution (at constant exchange rates) from acquisitions made in both 2014 and 2015. For acquisitions made in 2014 we calculate the additional contribution as the sales and profits made in the period of 2015 that corresponds to the pre-acquisition period in 2014. We also exclude sales and profits made by businesses disposed in either 2014 or 2015.

Adjusted operating profit excludes intangible amortisation and impairment, acquisition related costs and other gains and losses related to acquisitions and disposals. The statutory operating loss on continuing operations of £79m in the first half of 2015 compares to a loss of £26m in the first half of 2014. The decrease mainly reflects impairment losses of £70m relating to the proposed sale of PowerSchool. The impairment reflects the reduced market opportunity for software which was to be integrated with PowerSchool and the recognition that adoption of such software in US Schools is now unlikely to occur at the rate originally envisaged.

The sale of PowerSchool was announced in June 2015 and is expected to complete in the second half of 2015. The net assets have been treated as held for sale on the balance sheet at 30 June 2015. Proceeds from the sale are expected to be $350m and the profit before tax and after the impairments noted above is estimated at $50m. The results of the PowerSchool business are included in continuing operations.

Discontinued operations

There were no discontinued operations in 2015. The sale of Mergermarket to BC partners was completed on 4 February 2014 and resulted in a gain of £244m before tax. The gain on sale and the results for 2014 to the date of sale have been included in discontinued operations.

Also included in discontinued operations in 2014 is a gain of £29m (2014 half year: £56m) relating to adjustments to liabilities arising on the formation of the Penguin Random House group. Although this transaction completed in 2013 there were subsequent adjustments relating to the potential transfer of pension liabilities and tax.

Net finance costs

Net interest payable to 30 June 2015 was £29m, compared to £28m in the first half of 2014. An increase in interest payable was mainly due to the impact of a stronger US dollar in the first half of 2015 compared to the first half of 2014 which was partly offset by additional interest receivable on cash balances held overseas.

Finance income and costs relating to retirement benefits have been excluded from our adjusted earnings as we believe the income statement presentation does not reflect the economic substance of the underlying assets and liabilities. Also included in the statutory definition of net finance costs (but not in our adjusted measure) are foreign exchange and other gains and losses. Foreign exchange and other gains and losses are excluded from adjusted earnings as they represent short-term fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold the related instruments to maturity.

In the period to 30 June 2015, the total of these items excluded from adjusted earnings was a gain of £26m compared to a gain of £29m in the period to 30 June 2014. The gains in 2015 and 2014 largely relate to foreign exchange differences on cash and cash equivalents and inter-company loans.

Taxation

Taxes on income in the period are accrued using the tax rates that would be applicable to expected annual earnings. The reported tax charge on statutory earnings for the six months to 30 June 2015 was a £36m credit compared to an £10m credit in the period to 30 June 2014. The benefit reflects the overall mix of profits projected for the full year and the tax rates expected to apply to those statutory profits.

The effective tax rate on adjusted earnings for the six months to 30 June 2015 is 17.0% (2014 half year: 20.0%). This rate is lower than the average statutory rate applicable to the countries we operate in as it includes the benefit of tax deductions attributable to amortisation of goodwill and other intangibles. The benefit more accurately aligns the adjusted tax charge with the expected rate of cash tax payment.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of £220m at 30 June 2015 compares to a loss at 30 June 2014 of £119m and has arisen due to the strength of sterling relative to many of the currencies that Pearson is exposed to. In 2014 the loss was principally due to movements in the US dollar. A significant proportion of the group’s operations are based in the US and the US dollar weakened slightly in 2015 from an opening rate of £1:$1.56 to a closing rate at the end of June 2015 of £1:$1.57. At the end of June 2014 the US dollar had weakened in comparison to the opening rate moving from £1:$1.66 to £1:$1.71.

Also included in other comprehensive income in 2015 is an actuarial loss of £45m in relation to post retirement plans. This loss mainly arises from changes in the assumptions used to value the liabilities in the plans, the effect of which in aggregate exceeded returns on plan assets. The loss compares to an actuarial gain at 30 June 2014 of £4m.

Post-retirement benefits

Pearson operates a variety of pension and post-retirement plans. Our UK group pension plan has by far the largest defined benefit section. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of our companies operate defined contribution plans. In addition to pension plans we also operate post-retirement medical benefit plans (PRMBs), the most significant of which is in the US. In the first half of 2014 we amended the eligibility criteria for the US PRMB plan. This amendment resulted in a curtailment gain and a reduction in the on-going service cost of the plan.

The charge to profit in respect of worldwide pensions and retirement benefits for continuing operations amounted to £47m in the period to 30 June 2015 (30 June 2014: £32m) of which a charge of £49m (30 June 2014: £34m) was reported in adjusted operating profit and an income of £2m (30 June 2014: £2m) was reported against other net finance costs. The lower charge in 2014 is in part due to the US PRMB curtailment gain.

The overall surplus on the UK group pension plan of £190m at the end of 2014 has decreased to a surplus of £160m at 30 June 2015. The movement has arisen principally due to an unfavourable movement in the discount rate used to value the liabilities which more than offset the impact of asset returns and continuing contributions. In total, our worldwide surplus in respect of pensions and other post-retirement benefits at the end of 2014 reduced from £27m to £23m at the end of June 2015.

Dividends

The dividend accounted for in the six months to 30 June 2015 is the final dividend in respect of 2014 of 34.0p. An interim dividend for 2015 of 18.0p was approved by the Board in July 2015 and will be accounted for in the second half of 2015.

Principal risks and uncertainties

The principal risks and uncertainties have not changed from those detailed in the 2014 Annual Report and are summarised below:

Government regulation and decisions

Changes in funding, policy and/or regulations impact business model and/or content decisions across all markets.

Digital and services evolution and market forces

Failure to successfully invest in and deliver the right products and services.

Acquisitions, divestments and joint ventures

Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions, mergers and other business combinations could lead to goodwill and intangible asset impairments.

Business transformation and change

The pace and scope of our business transformation initiatives increase the execution risk that benefits may not be fully realised, costs of these changes may increase, or that our business as usual activities do not perform in line with expectations.

Talent

Failure to attract, retain and develop staff, including adapting to new skill sets required to run the business.

Customer facing systems

Failure to maintain and support customer facing services, systems, and platforms, including quality and timely execution of new products and enhancements.

Testing failure

A control breakdown or service failure in our school assessment and qualifications businesses could result in financial loss and reputational damage. Our professional services and school assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed.

Safety, safeguarding and protection

Failure to adequately protect children and learners, particularly in our direct delivery businesses.

Tax

Risk that changes in tax law or perceptions on tax planning strategies lead to higher effective tax rate or negative reputational impact.

Intellectual property

If we do not adequately protect our intellectual property and proprietary rights our competitive position and results may be adversely affected and limit our ability to grow.

Data privacy and cyber security

Failure to comply with data privacy regulations and standards or weakness in information security, including a failure to prevent or detect a malicious attack on our systems, could result in a major data privacy breach causing reputational damage to our brands and financial loss.

Anti-bribery and corruption

Failure to effectively manage risks associated with compliance to global and local ABC legislation.