Per the Trend, Penguin Sales Are Roughly Flat As Profits Rise

Pearson reported full-year results Monday, in line with the "trading preview" offered in January, and Penguin's results were consistent with the recent trendline for successful trade houses: Sales of 1.045 billion pounds were up slightly on an adjusted basis (and down slightly, by 8 million pounds, on a topline basis, due to very modest strengthening in the pound versus the dollar), while margins rose to another new record: 111 million pounds, up 5 percent overall and 8 percent on an underlying basis. That leaves them with a margin for the year of a little under 11 percent, similar to that just reported by Simon & Schuster (though every company allocates costs between the publishing division and the parent company somewhat differently).

Penguin ceo John Makinson underscored that the company continues to outperform the book market as a whole, and says that "since 2008, we have increased our global market share from 13.2 percent to 15.7 percent."

For the full year, ebook sales "doubled on the previous year and accounted for 12 percent of Penguin revenues" worldwide, and "more than 20 percent in the US" and they "expect this percentage to increase significantly again in 2012."  (Consistent with other reports and the holiday tilt towards physical books, that full-year percentage is lower than the 14 percent of worldwide sales that ebooks comprised at the half-way point of the year.) While the company does not currently breakout ebook sales in the UK, Makinson indicated that using the released figures, "you can reverse into a UK number which would be a little bit below 10 percent" of sales. He noted that because of their product mix in the UK, which includes the resurgent DK and their highly-visual nonfiction, Penguin's current ebook percentage may be lower than that of houses with more of an emphasis on commercial fiction.

Alongside the "fantastic" peformance at DK, Makinson said that children's publishing "was very strong...around the world," and is "one of the few areas of the market continuing to show very healthy trends." In the US, Penguin USA ceo David Shanks added that their children's group "actually sold a lot more books than they had the previous year, even without Borders" in the marketplace.

Makinson noted that "we're going to see some deflation" and observers should not "be too concerned if you see some reduction in revenue levels" as lower-priced digital sales grow and print sales decline. "We're very much focused on unit profitability and spending a lot of time thinking about volume measures of performance, as opposed to dollar measures of performance." Lower total sales "doesn't mean necessarily that the business will become less profitable," since the reduction of print means the company "will be deploying a lot less capital" tied up in inventory. Makinson asserted that "everybody in the digital economy has seen some benefit," with lower prices for consumers, "a slightly higher margin" for publishers and "a higher average royalty for authors," particularly as ebooks take the place of mass-market paperbacks. He noted that publishers face "a rise in fixed-cost per unit as physical demand reduces...but a lot of your infrastructure costs remain," and argues that modest margin increases are necessary as sales flatten or fall in order "to replenish our capital."

At the same time, publishers are experiencing constant margin pressure from their retailers. Makinson said, they face "an online customer that is growing and growing and very well aware of its negotiating power as its position in the market increases" along with "a number of physical retailers saying we need some help from publishers to sustain our physical infrastructure." Indeed Penguin UK was one of the first major houses to agree to Waterstone's revised discount schedule, said to by others to be 60 percent. Makinson declined to comment on terms, but said "we wanted to be quite early in reaching an arrangement with Waterstones."

Looking out across 2012, Pearson indicates, "Penguin has performed strongly in recent years in the context of rapid structural change in the consumer publishing industry. We expect it to perform in line with the overall industry this year, facing tough conditions in the physical bookstore channel but helped by its strong position in digital."

That mimics results at Simon & Schuster as reported early in February, where sales declined 1 percent to $787 million and adjusted operating income rose to $85 million, and leaves both companies with similar profits margins of a little under 11 percent.

Companywide, Pearson had sales of 5.862 billion pounds, up 4 percent, with adjusted operating profit from continuing operations of 942 million pounds (or 86.5 pence per share), up 7 percent on an underlying basis and 10 percent overall. But overall profits declined compared to 2010 due to the absence of Interactive Data, which was sold during that year, and Pearson's stock has declined in trading so far today.

eBooks As Percentage of Worldwide Sales
Simon & Schuster        15.5 percent
Lagardere                       6 percent
HBG USA                22 percent (all digital)
Penguin                       12 percent
Harper                         10 percent (all digital; Q4 only)