UBS raises concerns as "minimally profitable" Pearson contract ends

(Alliance News) - Questions were raised over the profitability of Pearson PLC's contract with Arizona State University after the educational materials publisher retained its financial guidance despite saying the partnership will end next year.

Pearson on Tuesday morning said its Online Program Management partnership with ASU will end in June 2023. The UK company gave no reason for the termination of the 10-year collaboration, which saw Pearson help the university expand its online learning services.

"The profit impact of the contract termination will be modest in 2022 and 2023 and will be offset thereafter through eliminating related costs and re-directing investment across our strategic growth opportunities," the company said.

Pearson stressed its financial guidance for the current financial year remains unchanged, as does its medium-term outlook.

UBS said investors may become more cautious on placing value on OPM revenue with Pearson going forward following the end of the contract with ASU.

The Swiss bank noted that Pearson generated GBP260 million of revenue from the OPM business in 2021, and it estimates ASU OPM revenue was anywhere around GBP50 million to GBP100 million of that.

"It is a reminder that under an OPM contract, the IP sits with the university partner with the OPM operating as a service provider. It is also a concern that one of Pearson's largest contracts in this area was only minimally profitable given no change to guidance," said UBS.

The bank added that it thinks the end of the ASU contract could mean that Pearson's Virtual Learning segment does not grow in 2023 and 2024, versus current forecasts for underlying growth of 6% in both years.

"Pearson may need to invest more aggressively in online degree lead generation in order generate meaningful profits from its OPM business, for example by building its own Pearson-branded consumer destination for online degree programs," said UBS.

Shares in Pearson were marginally lower at 771.60 pence in London on Tuesday after, though had fallen as far as 743.20p at the open. Over the past 12 months, the stock has declined 5.2%.

By Lucy Heming; lucyheming@alliancenews.com

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