LONDON (Reuters) - Education group Pearson (PSON.L) lost almost a third of its market value on Wednesday after it ditched profit and dividend forecasts as it struggles to adapt to a digital age that has already upended the music and newspaper industries.
The world’s biggest education company, which traditionally makes most of its profit from textbooks and testing, said it would sell its stake in the Penguin Random House book venture to raise cash and invest in new technologies.
Pearson needs to rebuild its business in North America, its biggest market, where higher education customers are turning to cheaper digital alternatives or rented books, compounding a fall in college enrolment numbers due to an improving economy.
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.
“This is a tough time for the company, we have to move urgently and decisively,” said Fallon after the fifth profit warning of his four-year tenure as Pearson boss.
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 move more aggressively into ebooks and the book rental market by cutting prices in those sectors to drive sales.
Fallon, a 20-year company veteran, 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,” he said. “But I am also accountable for leading the company through what is a far more difficult period than anyone could have imagined.”
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 enrolment 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 Pearson’s net revenues in the North American higher education courseware market in the final quarter of 2016.
While American rivals such as McGraw Hill and Cengage have also reported tough trading, Pearson has been hit the hardest because it is the market leader. It still draws around half of its sales from print, meaning it could have years of tumult ahead.
“Overall, this is a very disappointing update, even considering that expectations on Pearson have been low for some time,” Barclays said in a note to clients. “This is a major capitulation in terms of management’s plans for the business.”
Fallon has had a torrid time since taking over four years ago, with a string of profit warnings marking his tenure in contrast to the steady growth enjoyed by his predecessor Marjorie Scardino during her 16 years in charge, when Pearson was seen as a darling of the stock market.
With a relatively new finance chief and chairman in place, investors had told Reuters in 2016 they wanted Fallon to stay to oversee the move to digital, but Wednesday’s latest warning came as a hammer blow to the firm and its shareholders.
“Management are still clinging to the mantra of a longer-term stable business but, with visibility so low on their key profit driver (U.S. higher education) and given the increasing signs of structural pressure, we do not see how management can have confidence they can turn things around,” Liberum analysts said.
When asked if he was the right man for the job, Fallon told reporters he had been asked by his board to implement the new digital adoption plans and that is what he intended to do.
A plan to cut 2,000 ebook rental prices by half also raised alarm among some analysts who remembered the numerous attempts the music industry made to crack internet sales.
“Investors have no visibility on what this company looks like in five years,” said Gary Paulin, Head of Global Equities for Northern Trust Capital Markets.
Pearson now sees 2017 profit between 570 million and 630 million pounds, compared with a market forecast of 704 million pounds. Adjusted earnings per share (EPS) are seen in a range of between 48.5 pence and 55.5 pence, below the 64 pence consensus.
Pearson, which owns 47 percent of the Penguin Random House book venture with Bertelsmann (BTGGg.F), said it may seek to sell its stake or recapitalise the business via adding debt and extracting a dividend in order to protect its balance sheet.
Bertelsmann said it was open to increasing its stake in the venture which publishes authors including John Grisham, Paulo Coelho and Fifty Shades of Grey writer E.L. James.
($1 = 0.8135 pounds)
Editing by Mark Potter and Pravin Char