Pearson released results for the first half of their year on Friday, reporting sales for Penguin that are both up and down. On the pure numbers, sales of £457 million were down £36 million, or 7 percent (and down less on a constant-exchange basis), and operating profit of £42 million fell £2 million. But an organizational change at Pearson late last year realigned the units that are reported as part of Penguin, and when the “underlying” results are adjusted to compare the ongoing pieces of Penguin, sales were flat and profits actually rose 13 percent. Penguin ceo John Makinson says that gain in profits was due to “the overall impact of the move to digital,” from more digital publishing but also very much from “using digital technology to improve our costs and productivity”; “the very strong performance of DK” and “the strength of our children’s publishing all over the world.”
eBook sales grew 128 percent, and now comprise 14 percent of Penguin sales overall, or approximately £64 million. (They were reported as 6 percent worldwide at the end of 2010.) In the US, digital comprises roughly 20 percent of sales, and Penguin declined to indicate a breakout for the UK, referring to the approximate industry-wide figure that has ebooks as about 6 percent of sales. Makinson noted that in children’s digital, “it’s a promising app market, which you can’t say of every market,” while Penguin USA ceo David Shanks emphasized that “97 percent of the children’s books were selling are print” and the growing children’s field is “still an excellent opportunity for anyone who feels threatened” by ebooks.” Barnes & Noble has publicized their expanded children’s bookselling space and Shanks added, “mass merchandisers have always embraced chidlren’s publishing and now they’re doing it even more.”
The company says “the US business continued to perform strongly,” and in the UK they “grew sales by 11 percent in a market that was down 3 percent.” The outlook for the second half of the year is consevative, with the company saying in the release: “Penguin is working through a period of significant industry change characterized by a rapid shift towards digital sales channels and digital books and intense pressure on physical book retailers, demonstrated most recently by the bankruptcy of Borders in the US. Penguin has performed well through these industry changes and, after a particularly strong competitive performance and financial results in 2010, we expect it to perform in line with the overall consumer publishing industry this year.”
Makinson notes that they “gained a lot of market share in the closing months of 2010 everywhere” and the second half of the year “comparables become much tougher,” which is part of what has “made us a little cautious.” There is, obviously, considerable uncertainty about how the Borders liquidation sales and subsequent closing of close to 400 stores will affect results. Shanks expects they are likely to “lose more sales in the midwest…and lose more in children’s books” after Borders is closed, and at the same time “we don’t really know how fast the ebook market will continue to grow.”
For those who like details, the corporate realignments that changed the “underlying” results at Penguin have Penguin Canada reporting results as part of the book publishing unit (they used to be report in to Pearson Canada) and the larger Pearson Education business in Australia now reporting in to Pearson instead of Penguin. In the annual report issued in February, the company said the changes had shifted sales of £41 and profits of £12 from Penguin to other parts of Pearson. Makinson says they still have not decided exactly how results from the Borders and Angus & Roberston web sites will be reported since they were bought by Pearson on a corporate level. A partial, but materially small, allocation will probably wind up as part of Penguin’s results eventually.
More broadly, Pearson’s dominant education business grew 6 percent in sales and 30 percent in adjusted operating profit, despite declines in the North American market. Overall Pearson sales of £2.416 billion for the first half of the year were up 3 percent, and 6 percent on a currency-neutral basis. The company raised its guidance for full-year profits and increased their interim dividend, and exceeded analysts’ expectations on the earnings for the first half of the year, with the stock rising on the increased expectations. They “expect sales and margin growth for the full year, based on good trading momentum – especially in digital businesses and developing markets.”
A number of analysts have suggested Pearson should sell Penguin (and/or the Financial Times unit). Chief executive Marjorie Scardino responded by saying, “These businesses have performed for us over a long period of time; as long as they are high-performing businesses we are interested.” She further explained, “These discussions go on in any company that is doing the job of running itself. You have to always be thinking about new ideas. That said, we do think we are less of a portfolio and more of a company. We are pretty happy that both Penguin and the FT educate business people – at least I hope they do.
Scardino was upbeat about ebook trends as well: “We have been growing in ebooks and other digital programs exponentially. People want to buy a whole book, they don’t want to buy a chapter or two. Digital books are a better margin product for us. Scardino added, “We see people buying more books when they buy online, it seems to be an easier thing. I think reading will carry on, I just think they will read differently. That is salutory for us.”
CFO Robin Freestone says they have £500 million in cash for additional acquisitions.