Pearson plc (PSO) Q4 2021 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Pearson’s 2021 Full Year Results. Today, we will host a presentation followed by Q&A session. [Operator Instructions] And with that, I will hand over to Andy and will start the presentation. [Video Presentation]

Good morning. Welcome again. And I am very pleased to welcome you here in person today and also all of you online. Thanks very much for joining. I know very, very busy for many of you and welcome to our full year results and strategy presentation. And I am here with my CFO, our CFO, Sally Johnson and the entire executive team that you see here and going to introduce themselves also after the presentation. And you will be hearing from this motley crew of divisional presidents shortly as we layout the strategy. And you will also hear about how our new company purpose, to add a life to a lifetime of learning really sits at the heart of everything we do. And then as I was just saying, you have just seen our own employees proudly sharing what that purpose means to them. What we are really doing is redefining Pearson’s purpose to meet this moment in our world, I think a moment where learning is becoming more fluid and exists inside and outside of formal education. It’s a purpose and a strategy, however, then nothing without the employees who bring those to life. And over the last 12 months, our employees have shown the dedication, the perseverance and commitment to drive Pearson forward. As you see throughout today’s presentation, everyone at Pearson has and will continue to be relentlessly focused on execution. That’s reflected in our strong financial performance in 2021, where we delivered ahead of expectations, with 8% sales growth and a 33% increase in profit to £385 million and with a cash conversion of 101%. Now, Sally will go into more details about future expectations shortly, but the headline is that we will deliver further sustainable revenue and profit growth for this year and beyond. The management team is aligned and we are focused on growth, managing our businesses well and delivering results. Today, I hope you will see a new Pearson, one that’s streamlined, well organized and working as a much more agile and interconnected company. I am more excited than ever about our opportunity to make a positive impact through both our products and our people as we continue to evolve our sustainable business plan to align with our company’s strategy and purpose. The digital growth and product development we will feature today is part of our effort to drive learning for everyone. We have also placed renewed energy into building our talent and our own innovation culture so people can make a difference at scale. And as we become more digital, we are providing products with a smaller carbon footprint that meets the demands of a green economy and influences action. And as such, we are on track with our goal to make Pearson a net zero carbon business by 2030. Now this time last year, I set out to create a strategy around a lifetime of learning. My priorities continue to center on building a company that is digital first, puts the consumer at its heart and delivers high-quality learning products to more people at scale than ever before. To do that, we created a new organizational structure with five core divisions and supplemented that with a dedicated direct-to-consumer team that successfully launched Pearson+. And we laid the foundations for our Workforce Skills business, and the leaders of those divisions have spent significant time crafting their strategies to execute on our plan. There is much work underway, and you’re going to hear more details from each of the divisional presidents today. We recognize that learning is no longer a stage in life. It’s a lifelong journey and we will continue to work with longstanding partners such as schools, universities and colleges, but we’re increasingly working more and more with employers. I think companies now play a critical role in that learning life cycle, and we have an opportunity to help individuals and employers turn the great resignation into the great reengagement. The recent acquisitions of Faethm and Credly in our Workforce Skills division signal the direction of travel you can expect from us including the expansion into data as a service for employers and into credentialing for employees. Now there are three reasons why I think Pearson will win. Firstly, we’re the world’s leading learning company with an unmatched scope and scale and the deep expertise of thousands of employees who deliver high-quality, trusted learning solutions every day. Secondly, we have a great foundation with established businesses that are well managed, cash generative and underpin the company financially. Thirdly, we are bringing together multiple facets of our expertise to deliver innovative digital learning products through a more connected commercial and consumer strategy. You should start to think about Pearson not just as a collection of individual businesses, but increasingly as a highly interconnected company with capabilities that work together to help people learn at multiple points in their lives. Pearson has the potential to greatly accelerate our growth when we leverage our businesses in a coordinated fashion across the entire spectrum of learning. Pearson+ will be the centerpiece of that growth effort as we believe – as we begin rather, to realize its potential beyond our higher education business. You are going to hear the team reference that today and I’ll lay out my vision for Pearson+ later in the presentation. So the success of Pearson and the work we do has never been more important. There’s been an incredible amount of progress this year. And during our time together today, I hope you get a better sense of our ability to deliver on our bold ambition. Now before we dive into each of the five businesses in detail, I’m going to hand over to Sally to take you through our financial performance and expectations. Sally?

Thanks, Andy, and hello, everybody. As Andy said, we delivered a strong group performance in 2021 with an 8% sales growth and profit of £385 million with a lower interest charge than previously expected of £57 million and a tax charge of 20%, we delivered an EPS of 34.9p, up 22%. Our cash performance was also strong with 101% operating cash conversion, driving an improved net debt position at the end of the year of £0.4 billion. We have a clear and rigorous capital allocation policy and a robust balance sheet with significant headroom. Our strong financial position has enabled us to make bolt-on acquisitions like Faethm and Credly, to help drive our strategy and future growth. Given these solid results and our confidence in the outlook, the Board are proposing a 5% increase in the dividend to 20.5p. We have also announced our intention to commence a share buyback during 2022 of £350 million. We shared our revenue performance with you along with more detailed data in our January trading update. There has been significant growth in the top line at Pearson which is in part due to the restrictions easing post COVID, but also due to the strategic positioning of our business and the growth initiatives that we’re undertaking. By way of a brief reminder, assessments and qualifications grew 18%, with VUE and Clinical revenues now having grown in comparison to 2019, demonstrating that 2021 performance is more than COVID recovery. Virtual Learning grew 11% with 17% growth in virtual schools and 7% underlying enrollment growth in OPM. English grew 17% and with a strong performance in both Pearson Test of English and our institutional courseware businesses, Workforce Skills grew 6%, and higher education declined 5%, less than in 2020. Group profit grew 33% to £385 million with operating leverage on our revenue growth and cost savings, offset by inflation and investment to drive future growth. At a divisional level, you can see more normalized margins as the business has recovered post COVID. Assessments and qualifications delivers more than 50% of group’s profits with a margin of 18%. Profit grew strongly in the year due to the operating leverage on revenue growth, partly offset by FX. Virtual Learning grew profit through margin on revenue growth and operating improvements in OPM, partly offset by investments in virtual schools in curriculum, enrollment processes and the teaching platform. Virtual Learning margins were low at 4% due to the lower profitability of the OPM business where we see potential for improvement and have demonstrated progress in 2021. English grew profit through the operating leverage on revenue growth. Margins improved from flat to 6%, and we would expect them to improve further as COVID recovery continues in 2022. Workforce maintained a margin of 16% with margin on revenue growth, partially offset by investments. We see opportunity to invest substantially in this division to drive significant future growth. Higher education profits reduced due to revenue declines and investment offset by continued substantial cost savings. The higher ed margin was 9%, which we expect to stabilize in 2022 and improve thereafter. Our reorganization into our 5 new global business divisions is now complete. We’ve incurred around £50 million of restructuring costs, and we expect – as expected, we’ve reinvested those savings into growth generation. The financial implications of the restructure of our corporate offices have also been finalized in 2021, incurring costs which are predominantly non-cash in nature of around £160 million. This has generated property savings of £10 million in 2022, which is incorporated in our guidance and £20 million thereafter. Our KPIs are brought together on the following 2 slides. Group digital sales grew 9%, meaning digital and digitally-enabled revenues now make up 75% of the business. Our divisional leaders will talk through these KPIs as they go through their divisions. We’ve once again seen a strong cash conversion of 101% and continue to manage our balance sheet and working capital efficiently with tight inventory management and strong collections. Turning to net debt, this decreased from £0.5 billion to £0.4 billion, with operating cash and the disposal of our Brazilian Sistemas business, partially offset by dividends, interest and tax, which included the state aid payment, which we expect to recover in time. Return on capital increased from 6.6% to 7.9%. And we continue to be disciplined in our investments and rigorous about securing the required returns. I’d like to touch on the dynamics of our cash flow before I later talk about how it will develop in the future. Firstly, looking at a simplified version of our cash flow, you can see that the key drivers of operating cash conversion are the investments we make in CapEx, such as enterprise technology and initiatives like our global ERP program and product development. Working capital levels are relatively low and flat. CapEx cash increased slightly in 2021 as we paused elements of technology programs at the height of the pandemic in 2020, and product development declined due to the natural ebb and flow of our product roadmaps. Turning to 2022 and beyond, my colleagues will take you through the divisional expectations for this year and out to 2025, which we’ve summarized on this slide. In 2022, at a group level, we expect revenue growth with higher education declines further moderating and growth in our other 4 divisions. Adjusted operating profit, interest and tax will be in line with current market expectations. Profit growth will be driven by the operating leverage on revenue growth and property cost savings, partially offset by inflation. In terms of investment, we see three key areas of focus: ongoing investment in our products and services and technology to maintain our competitive advantage in positions of strength; maintaining our investment in Pearson+ to accelerate our growth and our direct-to-consumer strategy; and the reallocation of resources to our workforce division where we see a significant growth opportunity. We will offset any increased inflationary pressures through cost efficiencies and as appropriate price increases. Cash conversion will continue to be strong and over 90%. The marketing process for our international courseware local publishing business is well underway and is progressing well. We expect it to conclude at some point during 2022. The sales and profits of this business can clearly be seen in our segmental analysis and we will update guidance as and when is relevant. These businesses do share costs with our other international businesses, duplication of which will need to be eliminated as TSAs unwind. You should also note that these businesses are H2 weighted given their nature. From a quarterly phasing perspective, group growth will be relatively consistent across the year with virtual learning H2 weighted aligning to the start of the new academic year and Assessment & Qualifications, H1 weighted, given the resumption of exams and with the U.S. now back to a more normal timing. Revenues for the businesses under strategic review will decline in H1 due to the discontinuation of certain low-margin businesses. As we look out to 2025, we expect the group to achieve mid-single digit revenue CAGR. And for 2022 to 2025, the margins will remain relatively stable then increasing to mid-teens by 2025. Looking at those key elements of the cash flow that I highlighted earlier, CapEx has peaked in 2021 as our enterprise technology and property transformation programs reach conclusion and will reduce from 2022 forward. We will reinvest this incremental cash into revenue-generated product development and still maintain our strong cash conversion. Return on capital will increase throughout the period and will be double digits by 2025. Our rigorous capital allocation policy is clear and consistent and serves the business well. Our balance sheet remains strong. Net debt is low and leverage is well below rating agency targets. Our dividend is progressive and sustainable. We continue to invest in our business. As I set out on the previous slide, we expect to maintain our strong cash conversion, whilst investing organically in product to drive growth. Whilst we see potential for further incremental M&A to accelerate our strategy and growth, it’s unlikely to utilize a significant proportion of our headroom. So we can continue to manage our balance sheet prudently and also return capital to shareholders by way of the £350 million share buyback, which will also mitigate the earnings dilution from the strategic disposal of those international courseware local publishing divisions. So in summary, we have exceeded the financial expectations in 2021 and we have improved return on capital. We’ve shared the KPIs, which we expect to drive the business and which will evolve as the strategy builds. We expect to meet expectations in 2022. And looking out to 2025, we expect good revenue growth and for margins to improve to mid-teens. Our strong balance sheet provides the capacity to invest in future growth and raise our dividend as well as making an additional £350 million return to shareholders. And with that, I will hand over to Bob.

Thanks Sally. I am Bob Whelan, and I’m the President of the Assessment & Qualifications business. Nice to see many of you here again today. I have seen some of you in the past and it’s nice to see you come back to see us. As you might already know, this is my last hurrah as President of the business. And I’ve been very excited to do it. I’m proud to have led this great business. We had a great year and I am very confident that we will continue to thrive under the new leadership of Art Valentine, who you meet in just a couple of seconds. I have a few highlights before I hand it over to Art. And it was a realistic year. Our message is simple. We are now the largest business at Pearson. Assessment & Qualifications is the largest business. That’s hard for me to say because for many years, we were not and we are very proud of that. We had an excellent year in 2021, and we’re poised to continue to grow as a source of really strength and stability in the company. Our business provides assessment and qualifications that lead to certifications and licenses that allow people to move on and demonstrate their knowledge for a lifetime of learning. From a youngster in pre-kindergarten all the way to someone advancing their career, assessments work for everybody to help them move along in their career. We also have clinical assessments, which diagnose why someone might have learned and how we can help them get along the way. In 2021, COVID impacted our business, but our teams really maintained the challenge in an environment to have a terrific year. Sales were up 18%, have to pause on that one. Profits were up 59%, which might require even a better pause. So we’re very proud of those numbers, and a lot of people worked hard to get there. This excellent performance was driven by VUE’s strong role in online proctoring, which accelerated very quickly during the pandemic. And then the second half of ‘21 when the test center started reopening again back to normal. The focus on mental health and new product offerings were key drivers in our clinical business, along with the excellent leadership of Art, who you’ll meet soon. U.S. assessment bounced back from 2020 cancellations to a more normal year with some choppiness of the exams moved from spring to fall and some grade levels drop the example, but it was much more normal in ‘21. UK qualifications saw most exams canceled in ‘21, but are going to resume in 2022, which they already have starting in January. Well, I have enjoyed a great run of Pearson, a great deal of gratitude for the many people and support – for their support and the contribution. Before I introduce Art, I have to thank Marjorie Scardino, John Fallon and Andy Bird, who believed in me enough to give me an opportunity to build this fantastic business. So with that, I’ll turn it over to Art.

I am just going to say, even though Bob is leaving Assessment & Qualifications, I’m not going to let him go too far and he is going to stay with the company and advise the company in a more broader capacity, because while he still wants to go play a bit of golf, it’s really important, he can help me and the rest of the team.

Anyway, Art, pretty easy to follow.

Thanks Bob. In 2022, we expect to continue our strong market position and share capture with low to mid-single-digit growth across the portfolio. We also expect to maintain our profitability and margins with each of the business units through 2025. We will continue to invest across the businesses to ensure we have innovative, best-in-class products and services. In 2022, U.S. student assessment will show high single-digit revenue growth, powered by a return to the normal cadence of in-classroom assessment delivery and the annualization of some of our large contracts that we have won. Our UK International and qualifications business has already started conducting exams this past January, and we expect to resume normal exam volumes later in the summer. We do expect this business to rebound to pre-COVID testing levels and revenue. Clinical Assessment revenues will be slightly down. We are going to show strong growth in our digital and subscription products. That’s going to be offset by a very strong 2021, where we had 2 stellar new product releases and some pent-up demand for clinical services. Our VUE business is going to be generally flat year-over-year. We continue to have very strong core volumes and a fantastic win rate of new contracts, but it’s going to be offset by a reduction in the UK Driver and Vehicle Standards Agency test. That’s the driver’s license here in the UK. We continue to expect to renew 98% or better of our contracts that’s consistent with prior year’s performance. Test volumes in 2021 were up 30% and will be stable to up slightly more in 2022 including mid single-digit growth in our on-view exam deliveries. That’s our remote proctoring offering. As we look into 2025, we expect the Assessment & Qualifications business to deliver low to mid-single-digit revenue and profit growth across the portfolio. VUE will return to low to mid-single-digit growth in 2023 and beyond as we enter new markets and broaden the solution set. Clinical will generate low to mid-single-digit growth as we continue to enhance the customer experience and invest in our digital initiatives. U.S. student assessment revenues will be flat over this horizon. We anticipate some changes in the contract portfolio as well as a move towards more frequent but shorter assessments. And our UK qualifications business will grow through international volume growth and our investment in the digital experience for our customers. In summary, the A&Q team is experienced knows their business, and we know how to deliver results. There are three reasons that we are very confident we’re going to continue to succeed. First off, we have long-term contracts, high renewal rates across multiple sectors and geographies. This allows us to weather macro changes in any one part of the market. You can see this on the chart of VUE’s revenues and we expect these trends to continue into the future. Second is the scale of our business. 17 million assessments, 20,000 test centers, 200 countries, the breadth of our business is a major competitive advantage. And then lastly, the continued demand for upscaling and rescaling continue to increase our market opportunity and allow us to integrate our products and services into other parts of Pearson. And with that, I will turn it over to Tom.

Good morning. It’s great to be with you here today. I’m Tom Ap Simon, and I lead Virtual Learning, and that comprises of virtual schools and online program management. And the path forward in virtual learning is clear. Our businesses meet today’s learning needs, where online and hybrid learning are becoming a norm and the lines between high school, higher education and workforce are blurring. And because of that, we are well positioned for continued growth. Currently, our virtual schools business supports nearly 50 virtual schools in the U.S. and the UK, around 110,000 students and 5,500 teachers. Our support for these schools includes marketing and enrollment services, the technology and curriculum to deliver individualized learning as well as a wide range of services from substitute teachers to special education. In online program management, we provide marketing and enrollment services, student support and instructional design for 477 programs across 31 academic partners globally. We see plenty of headroom for sustained growth in our Virtual Schools business over the long term, along with growth in the OPM business. And here’s the one. In Virtual Schools, we had a good track record of growth. In the 3 years before the pandemic, they achieved an enrollment CAGR of 9% and a revenue CAGR of 14%. The pandemic naturally drove increased uptake of virtual schooling in 2020. And in that year, we grew enrollments 43%. In 2021, despite a widespread return to bricks and mortar, we grew enrollments of further 2%, which we believe to be ahead of the overall market. And we estimate that the overall virtual schooling population in the U.S. is still only a small fraction of U.S. K-12 students today, around 1.5% of $3.5 billion. So there is significant room to grow. And our primary growth driver centers on increasing penetration in the 30 states where we already operate. And while we have a COVID cohort in our base for 2021, which we need to factor into 2022, we are confident that over the period to 2025, we can continue to grow in the mid-single digits because of the growing acceptance of virtual learning, the increased ability of parents to work remotely and to support learning at home. In turn, the OPM market was worth $4.5 billion in 2021, and we expect it to grow at 14% over the next 4 years. The market is relatively fragmented and growth has been driven by a strong rise in online enrollments and increasing propensity to outsource by universities. The division has undergone extensive changes over the last 2 years and we’re now 10 months into a transformation program designed to reduce fixed costs and improve our marketing and enrollment funnel for cost efficiencies and better conversion rates. We have also reduced a number of programs where we could not scale or reach profitability. So pulling this all together, what does it mean for future growth? In 2022, we anticipate sales growth to be low single digits in Virtual Schools as the COVID cohort unwinds. And high single-digit in OPM as the impact of discontinued programs has ended. We expect to see continued margin expansion in virtual learning as margins in OPM improve due to operational efficiencies. And longer term, we expect a 22 to 25 sales CAGR in mid-single digits for Virtual Schools and high single digits in OPM. And growth in Virtual Schools is supported by opening 3 new schools a year offset by the loss of 1 school annually and in OPM by the addition of some 40 to 50 new programs per year. By 2025, we anticipate operating profit margins will be low double digit largely driven by operating leverage and improved profitability in OPM. So we have strong foundations in both Virtual Schools and OPM that lay a solid path forward. And I will leave you with four reasons why we are going to deliver on growth for shareholders and a high-quality experience for students. Firstly, the pandemic has entrenched virtual learning across the board, giving more people more exposure to it and increasing the use of hybrid learning models. Secondly, we have a market leading position as 1 of only 2 national players in U.S. virtual schools. Thirdly, we are going to capitalize on this market opportunity, thanks to our 20 years of experience, our strongly differentiated value proposition and our good track record of growth. And furthermore, we are uniquely positioned as part of Pearson to benefit from a wider offering as those lines blur between high school, higher education and workforce. And lastly, in our OPM business, we are focused on a complete reset with the aim of building a profitable business, which provides close linkages to both Virtual Schools and to workforce. This is why we feel confident about the virtual learning strategy as well as the synergies to the lifelong learning story at Pearson. Thank you. And I will now hand it over to Gio.

Thank you, Tom. Hi, everyone, I’m Gio, and I lead our English Language Learning business. Our vision at ELL is to be the world’s leading destination for committed learners to prove – to be able to improve their English proficiency. With 1.5 billion people currently learning English, there is a big opportunity for us to grow in the institutional assessment and direct-to-consumer spaces. And we are well positioned to capitalize on it. We’re focused on those who define as the committed learners, those who dedicate time and money to language learning. English is a gateway to the world. More than 140 countries include English as a mandatory subject in their national curriculum. English is indispensable in the workplace, making it a vital part of closing the skills gap globally. Our ELL division grew its revenues in 2021 by 17% to £238 million. We have well-established businesses with solid market shares, plenty of room to grow and the ability to contribute to the success of other Pearson divisions. We’ve also built a strong brand and developed a unique IP and services like our proprietary international recognized global skill of English against which we map all our content and assessments as well as the Pearson Test of English, which has a growing synergy with Pearson VUE. Our Versant testing product also has crossover potential with Pearson’s new Workforce Skills division, and Mike will address that shortly. Our go-forward strategy focuses on 3 market segments: first, institutional ELL. It’s a growing global market worth £2.2 billion, of which £1.5 billion is courseware. We are one of the three biggest players in courseware with circa 11% market share, and we generated £160 million of revenue in 2021, up 13% on prior year. Our value proposition to academic institutions and to private language schools, is made up of digital and blended solutions and reaches indirectly some 21 million people in 160 countries. Second, the growing £0.8 billion market for high-stakes English assessments, meaning those that are officially recognized by immigration authorities, universities and professional bodies. We are well placed to win in this segment with our flagship PTE. It’s a top 3 player with a volume share of circa 10% that has been taken over 400,000 times in 2021 and has revenues of £78 million, up 23% on prior year. A key focus for us is to grow more in the direct-to-consumer space. We estimate the online direct-to-consumer English market that we want to focus on to be worth more than £1.5 billion and to grow at double digits in the next 5 years. This segment benefited from the shift to online brought by the pandemic and can be an effective, engaging and affordable way to learn for millions of people. We’re actively exploring how to best grow in this exciting DTC space, including the role of an ELL offering within the Pearson+ ecosystem over time. And we’ll update you as our strategy progresses. We are excited by this growth opportunity in each of the 3 market segments. In 2022, we foresee mid-single-digit revenue growth underpinned by PTE volumes as the business continues to recover from COVID-19 with margins improving versus 2021. In the next 5 years, we expect mid to high single-digit revenue growth. PTE will be a core driver. And because of our operational leverage, we can expect margin enhancement across ELL to mid-teens by 2025. While we further build our direct-to-consumer strategy, the key to our success will come from winning in our other market segments, especially high stakes assessments. Here is how we will do it. We will focus on maintaining our differentiation in PTE and continue to improve the test taking experience. PTE is already a world-class fully digital, computer-based test with high security and AI-powered, unbiased scoring. We deliver score reports to test takers faster than anyone else with an average time of 1.2 days. We are widely available in more than 110 countries thanks to our network of over 380 Pearson VUE and third-party test centers. Last year, we reduced the length of the test to make it more convenient, and we launched the first online at-home PTE academic test made possible by Pearson’s on VUE online proctoring. It’s yet another example on how we’re leveraging capabilities across divisions. So with a consumer-friendly test and a wide delivery network through Pearson VUE, we will continue to expand our addressable market through gaining recognition from universities and governments across the globe. One recent example of this is the UK where we developed our new test, the PTE Home portfolio. And last year, we grew our volumes by 42% versus 2020 and almost double versus 2019 levels. In short, with a focus on our institutional business, continuing to grow in our high stakes assessment business and building our consumer strategy, we believe that we can be a big contributor to Pearson’s lifelong learning mission. Thank you for listening. And I’ll now pass it over to Mike.

Thanks, Gio. Hi, everyone. I’m Mike Howells, and I have the privilege and the pleasure of leading our new Workforce Skills division. Now the headline for this business is straightforward. We are transitioning to a new business model, a new go-to-market strategy for Pearson as a strategic solutions provider for workforce skills. And I want to tell you why we are confident we are going to succeed. We spent the last few months engaging deeply with our partners in Pearson’s fantastic global network to understand the challenges that our customers face. And they are clear and consistent. Existing solutions are fragmented and do not work well together, deliver poor ROI and above all, a poor employee experience. Many businesses are trying to solve these problems, and there are some great offerings out there. But this market, which is valued at $100 billion in the U.S. alone, is still in the rapid early phase of disruption. And we are confident that Pearson can differentiate by exploiting four important competitive advantages: First, the ability to provide our customers with an integrated end-to-end set of solutions from diagnosing the problems they face to providing the learning solutions to meet their specific needs and verifying the outcomes that they have achieved. Second, Pearson’s reach and scale, which allows us to address the needs of individuals, enterprises, governments and institutions through a single ecosystem of products and services. Third, our new status as one of the leading sources of accurate, trusted data on skills and talent, a theme that you’ll hear throughout the conversation today. And fourth, a global brand recognized for the rigor and quality of our learning solutions. So, let me take you through that in a bit more detail. Firstly, our new business model will give enterprises what they want, an integrated solution to address their specific problems and drive verifiable returns at scale. To build this model, we have started with Pearson’s current excellent enterprise products, such as TalentLens, Versant in our English business, GED testing service, Accelerated Pathways and, of course, Pearson VUE. Now in the past, we have largely taken these products and services to market case by case, but we are now bringing them together into a single solution suite and building a world-class enterprise sales team to take them to market. This will allow us to generate greater revenues from Pearson’s existing portfolio. And it’s an example of how we are connecting offerings from across our five divisions. To that portfolio, we have added our first acquisition, Faethm, our AI-driven strategic workforce analytics and planning platform. Now Faethm helps enterprises diagnose what skills they will need to be successful, verified by millions of pieces of data and they have worked with hundreds of companies over the last 5 years. And we invite you to stay on after the presentation for a demo of Faethm. Then as we announced at the end of last month, we expanded our product suite to include Credly, the world’s largest digital credentialing network. With Credly, employees can prove what skills they have learned and employers can source what skills they need. And the team at Credly has put together this quick glimpse at the platform. [Video Presentation]

Now, the Credly team will also be available after the presentation. And as you saw from that video, Credly expands our opportunity in the Workforce Skills space. And with Faethm and Credly, we have a comprehensive, accurate and future-looking dataset on demand and supply in the skills economy today. And by bringing these new capabilities together with Pearson’s learning portfolio, we have created an unmatched end-to-end value proposition for employees. You can envision a scenario where much of this learning also becomes available via Pearson+ and yet another opportunity to expand the scope of that product. Our second competitive advantage is our reach and scale. Pearson has an outstanding ability in this market to cater to the needs of governments and institutions, enterprises and individuals. And it’s the link between the needs of employers and individuals that is particularly crucial. It’s a difficult problem to crack. Very few learning providers have served both successfully, and we are targeting that challenge from the start, combining our deep expertise in building learning experiences for individuals, with our new enterprise focus capabilities in Faethm and Credly who serve over 2,000 enterprises and organizations combined today. We want to help individual learners access the right solutions for them and help employers to attract, retain and develop the right talent. The key to doing so and our third competitive advantage is the ability to provide accurate, verified and trusted data on skills. Skills are the new currency of the labor market. Employers and employees are moving away from traditional learning paths and talent solutions. Accurate, unbiased data on skills will help employers to know what they need and how to get it. The old CV or resume is long past its sell by date. We need to enable a world in which opportunity is based on real insights about what you can do, not inaccurate inferences from what you’ve done in the past. And finally, linking all this together is Pearson’s brand. Large enterprises are positive knowledge about our entry to this market. They already know our reputation for quality from products like TalentLens, VUE, BTEC and PTE. It’s the knowledge that if you have a learning experience with Pearson, it will get you where you want to go. And if you receive a credential or a qualification from Pearson that it is worth something. Now the transition that we’re making is not a simple undertaking. We’ve spent the time since the division was formed last July, doing the hard yards to build the foundations that we need. We’ve integrated our existing businesses, together with our new acquisitions into a performance-focused structure, which will deliver revenue growth across our portfolio. Our newly combined workforce qualifications business comprising BTEC apprenticeships and higher education qualifications already has scale. It will continue to grow in the UK market, and we see more opportunity to grow internationally using our data and analytics capabilities to work with government partners around the world to close their skills gaps. And our new Workforce Solutions business combines our smaller, faster-growing assets together with Faethm and Credly, and our new products that will come on stream this year to create the engine room for rapid growth in our new B2B market. We have a range of pilot and beta testing projects underway, including with key partners, that will help us to continue to refine our offering. We currently have a mix of direct sales and channel partnerships, which we expect to continue. And we are using our new acquisitions to build out a scalable enterprise sales force for our new connected products. We will grow our customers and annual recurring revenue by leveraging Pearson’s wider existing client relationships and the expansion of our product offering. Now while doing all of that, we’ve also been out winning new business and onboarding new clients, including 22 new corporate clients in the last 6 months, ranging from large consumer technology platforms to global financial services firms, amongst them, the likes of Standard Chartered and Sky TV. In 2022, we anticipate Workforce Skills headline sales to grow significantly, the majority of growth due to the acquisition of Faethm and Credly with both businesses growing by more than 40% on an underlying basis. Excluding acquisitions, we anticipate mid to high single-digit underlying growth with higher growth in our smaller B2B-focused products and in international markets, and more modest growth in our core UK qualifications business. Workforce is a high-margin business. And the key for us is growing scale. We will therefore be investing significantly in 2022 to accelerate our product road map and market position and expect margins to be broadly breakeven. By 2025, we expect the division to more than double in size and to reach margins in the low double digits as the business scales and our new investments mature. Our new KPIs will be our total number of enterprise customers, enterprise customer net retention rate and number of Workforce Skills registered users. So to recap, we are confident we are positioning Pearson to capitalize in a significant way on the workforce skills opportunity with an end-to-end solution that will serve employers and workers in one integrated ecosystem, a trusted portfolio of products and services and a business that can make Pearson the market leader in much-needed labor and talent data. This is an enormously exciting time as we play a critical role in moving Pearson’s strategy forward. Thanks very much for listening. And I’ll now pass over to Tim.

Well, thank you, Mike, and hello, everybody. I’m Tim Bozik, and I lead our Higher Education division and I co-lead our direct to consumer division with Lynne Frank. The headline for our Higher Education division is straightforward. We’re moving to a place of stability, and we will drive digital growth in an expanded market. Before I go into detail on that a bit about where the market and business stand today. While we operate our higher education business globally, over 80% of the revenue comes from the U.S., so I want to focus on that today. Our current total addressable market is defined by the number of students and the number of courses they take with required courseware or simply put, student enrollment and course enrollments. Those students spend an estimated £5 billion on those required materials. And while our business model is currently defined by winning course adoptions, we’re also in a market that’s becoming increasingly consumer-led. That means we have the opportunity to expand our addressable market beyond students who are enrolled in university and assigned courseware to anyone who needs to supplement their learning. In just a moment, I’ll walk you through how Pearson+, can help us do that. In 2021, our digital registrations dipped 7%, reflecting lower enrollments and more on-campus instruction. Our Pearson+ registered users were at 2.75 million and text unit volume, which is the combination of stand-alone print, print rentals and e-books stood at 5.4 million units, which was essentially flat to 2020, indicating secondary recapture amid lower enrollments. For 2022, we expect sales to be down, but by less than last year and margins to stabilize as we drive cost optimizations. Now there are some key assumptions underpinning us. We expect student enrollment declines this spring, reflecting last fall’s drop and the flow-through from that. And our plan also assumes continued declines from fall ‘22 at a lower rate, but that could improve. We expect course enrollments to reflect those student enrollments. But while we’ve seen students taking fewer courses during the pandemic, universities in the U.S. still require the same number of courses to complete a degree, and students will need to catch up at some point. So we’re going to pay very close attention to a potential uptick of those deferred courses. Our product mix will continue to shift from print to e-books and Pearson+ and from bundles to digital-only. Print is now a relatively small portion of the business with diminishing downside which I’ll speak to later. And we expect ongoing growth in both Inclusive Access and Pearson+. Through 2025, we expect low to mid-single-digit revenue growth and margin improvements to the mid-teens due to the operating leverage and cost efficiencies. Now there are three key drivers that will lead to stabilization and digital growth for the higher education business. First, we will continue to enhance our core products, Mastering, MyLab and Revel. These are widely adopted products because they solve customer problems. They provide great instructor tools and interactive learning experiences for students. This is the core of our business, and we’ve been investing to enhance the student learning experience using the capabilities of the Pearson’s Learning platform. Specifically, we’re moving our Mastering and MyLab applications to the cloud to improve reliability and stability. That will be close to complete by the end of this year. We’re also consolidating these platforms into a single application for more consistent user experience and faster innovation. The next driver of our success is secondary recapture. Overall, the upside opportunity to recapture secondary consumption remains substantial especially as we continue to reduce secondary supply and ship the delivery to Inclusive Access and Pearson+. It’s important remember that underlying level, consumer choice is trending increasingly to digital, which leaves print with diminishing downside. On that point, it’s important to remember a few key facts. Retrospectively, we sold considerably less print into the channel, nearly 6 million units in 2018 to 2 million in 2021. That reduces secondary supply. Prospectively, our print mix is shifting across three commercial formats: rental, stand-alone sales and bundles. Rental title availability is rising for our highest volume titles. We will have over 400 titles available in the rental program by fall ‘22 and nearly all of them by 2025. And as a reminder, the titles in our rental program are available exclusively from us through partners. That means the secondary supply for our top volume titles will become obsolete. And for consumers who want print, we will get paid. The remaining stand-alone print sales, they are increasingly a long tail of titles with revenue we expect to decline but more steadily over time. And we expect bundles to go to zero as consumers shift to a digital platform only, and they rent print if they want a physical text. Now when that happens, the revenue loss from the roughly 500,000 bundles that we sold in 2021 is less than $25 million based on the price difference. That’s built into our plan. So with secondary supply and the associated downside reduced demand recapture will grow with Inclusive Access and Pearson+. So speaking of Pearson+, the third driver of our success will be the ability to scale the platform and expand the addressable market. So why am I and all of us so upbeat about Pearson+? Well, first, we made a really good start. With the release that was just weeks before the start of fall classes, we had 2.75 million total registered users, including 133,000 paid subscriptions and over 1,600 titles available in service by the end of the year. Our App Store rating stands at an impressive 4.8 because we listen closely to customers and continuously improve the experience. Further, we will expand our market reach to Canada and other international regions starting in 2023. And we’re also introducing two significant new services on the Pearson+ platform this year. These are services we believe we’ve got conviction that they’ll increase the appeal of the product for any student who needs extra opportunities to learn, not just those who are assigned a Pearson eText. In just a moment, you’ll see a short download of the Pearson+ channels and our social features. Both those services are live in production pilots now and they are going to roll out further throughout the year. Some of the team who built and managed the product are here today. They are a terrific group with significant direct-to-consumer experience and accomplishments in direct-to-consumer product, design and tech. Some of you saw a live demo this morning, and I invite you to a presentation as they’ll lead afterwards as well. So let’s take a look now at the new futures by video. [Video Presentation]

Alright. I hope you can see why we’re so excited about channels and social. And I’m thrilled to announce today that we signed an agreement to acquire Clutch Prep. They are an online video-based learning service that will rapidly fuel our channels content with quality original video tours. The Clutch prep team has been at this for 10 years, creating a short-form video and practice library with remarkably simple explanations to help students get better grades and save time in the toughest college courses. So just to recap before I hand back to Andy, the higher education business is on the right track for stabilization and growth. And we will deliver that by maintaining the strength of our core products, continuing our aggressive pursuit of the secondary market and by scaling and enhancing Pearson+. I hope that gives you a sense of why we’re confident and excited about this division and the potential it has to contribute to the future growth of Pearson. Thank you. Now, back to Andy.

Thanks, Tim. So in summary, Assessment & Qualifications is a source of strength and stability in the company and we expect that to continue in 2022 as that business maintains its broad, long-standing customer base, fed by the market demand for upskilling and reskilling. Our virtual learning business is poised to benefit from the normalization of online schooling and from our strong foundation in OPM, which provides upside. Our ELL business aims to be the destination for committed English learners and we’re pursuing that with institutional business and high stake assessments as well as a direct-to-consumer strategy. You’ve also seen today the strategy for our Workforce Skills division which we will execute by bringing to market an end-to-end business solution that meets the learning and upskilling needs of both employers and employees. And finally, you just heard from Tim talking about the path to stability and the digital growth for our higher education business, anchored by our trusted core products, the capture of the secondary market and the growth of Pearson+. 12 months ago, I laid out a strategy for this new Pearson, and I truly believe that we’re at a pivotal and important inflection point in our evolution. Now as we move into 2022, my priorities are very clear. Firstly, we’re going to deliver sales and profit growth. Secondly, we’re going to continue the focus on execution, quality and trust. We’re going to further embed customer and consumer insights across the entire company and we’re going to progress and scale Pearson+. As I have shared when we launched Pearson+ last July, I’ve always felt that higher education was just the starting point for a broader consumer offering. It’s now time to start seeing Pearson+ in a new light. Earlier today, I talked about how building a connected consumer and commercial strategy is one of the ways that we’re going to win. Pearson+ will be the connected product experience to deliver that. And as you just saw in Tim’s presentation, the team is already making great progress against that goal. Going forward, we’re going to share Pearson+ registered users and subscriptions at each of our prelims and interim results so that we can mirror the fiscal and academic year. We’re building Pearson+ to be the premier digital ecosystem for lifelong learning, whether through school, university, work, languages or life skills. Today, we’ve reached tens of millions of people. With Pearson+, we aim to scale to a growing addressable market of even more people and do it globally. Consumers need a way to discover, learn, build skills and show credentials, and they want a great user experience, and we’re going to deliver that with a broader Pearson+ vision. Now that’s possible by drawing on the current assets of the company, including our recent acquisitions and also through new investments. We will leverage our growing relationships with students, consumers, enterprises, and we’re going to target their specific needs through a robust data infrastructure. Now I think the possibilities are vast when we connect all of this into one experience to meet consumer-led learning where it happens. You can see some of that potential in today’s demo of Pearson+ channels. And using that model, it’s easy to imagine how we could deliver content and channels for everything from language learning to life skills. Now when you add our diagnostics, assessments and credentials, Pearson has the ability to scale and to succeed, and that’s what we’re going to do. Pearson+ is the digital future of the company. I believe it has the potential to be transformational by creating an entirely new business generating incremental growth. Now you’ve heard today about the foundational strength of our core businesses and the opportunity over the coming years for our five divisions, Pearson+ has the potential to drive that growth beyond that. And I hope you now have a sense of where we’re heading. I think it’s exciting and Pearson+ will become the company’s North Star. While we execute today, we’re working hard across the company to deliver a bright tomorrow and one that’s focused on where the market is going, one that plays to our strengths and takes all the parts of this company and makes us one to drive growth for consumers and for shareholders alike. And with that, we will be very happy to take any of your questions, both in the room, and for those of you who are watching us online, please post your questions in the chat function, and Jo will act as the moderator and translate those to us. If you do have a question in the room, please raise your hand and wait for a microphone so that the people online can hear your question. Okay. So if we may, yes, I have to pull this back a bit, hold on one second, sorry. Here we go. I hope that’s good. Thank you, though, excellent.

Okay. If we – these people probably have the microphones. That’s what I’m guessing. I’d also like to say that our Chairman, Sidney Taurel, is here with us as well.

We will take the first question from Nick Dempsey.

Yes. Good morning, everyone. I’ve got three questions, please. So first one, I’m assuming that your forecast of more than doubling Workforce Skills revenues by ‘25 is all organic. And if so, I’m kind of backing out 20% to 25% organic growth for the 3 years beyond ‘22. So inside that, are you assuming any reduction in the BTEC business in the UK as T levels come on stream or do you have a more optimistic assumption for that slice of the revenues? Second question, can you give us a sense of the scale of the stranded costs that you mentioned will be left behind once you’ve sold the businesses under strategic review? And the third question, in Higher Ed, Cengage sticks their version of MyLabs and Mastering into Cengage Unlimited. Do you think that you’ll have to do that eventually to kind of match the product? And will that represent another leg of revenue reduction per student as you get a kind of bundling effect there?

If you want, I can – I’ll start with the last question and then hand over to Sally for the first two questions. I think the way that certainly we look at our Higher Education business and why we started in the Higher Education business with Pearson+ is we have a defined cohort of users of Pearson product today, about 10 million students. And they are a very low-cost and efficient consumer acquisition tool. So if you think of the cost of acquisition for that 2.75 million students, the majority of whom actually came through Mastering and MyLabs, into the Pearson+ ecosystem, that is a very, very cost-effective way of generating scale within that community. Now as we add channels and other functionality to Pearson+ this year and in the coming years, we create – this is always what I said at the end of last year, why that registered user number is very, very important. I hope now you get – you kind of get a sense that there are really three phases in the evolution of Pearson+ growth. Today, for those students who are using a Pearson textbook or MLM, later this year – actually starting now, any student in the U.S. and then any student globally, and with the increased functionality that I hinted at and the opportunity I hinted at, at the end of my presentation, we can expand that to anyone who kind of wants to learn anything and really utilize the leverage, the assets that we have. So we will build a seamless and have – are building a seamless integration between Mastering and MyLabs into Pearson+. The cost of that to a student and to your – the financial aspect of your question, we do not see a need for us to reduce that. We see you enter through the Mastering and MyLabs funnel. And now rather than go get an eText or get a physical book, you got sent into the world of Pearson+. And when you’re there in the future, you’re able to discover a whole host of other features within higher education and beyond as we expand the product. Sally, would you like to pick up?

I’d love to. Hi, Nick. So on stranded costs, I’ll update guidance at the point that we’ve got anything to say around those businesses at whatever point in the year it is. And I’m sure you understand that presuming it’s a normal disposal, there’ll be TSAs in place for a while because the other side will need those services. And that will give us some time to work through how we eliminate any duplicated costs. We’re talking about a cost of sort of £10 million to £15 million. And then on Workforce, I’ll give you the sort of short financial answer and then I’ll pass over to Mike to give you a little bit more flavor. The 2022, I’ve tried to break it down for you so that you can see the kind of underlying organic growth of the existing business. And then I’ve given you growth rates for the two acquisitions we’ve made. Then from ‘22 to ‘25, of course, they will be in the base of organic going forward. Mike, do you want to add some flavor?

I would just say on the effect of the L3 policy review on BTEC revenue, of course, that’s a factor. But we have a wide portfolio of services. We’re also a T-level provider. So we’ve got enough optionality in the portfolio to cover changes in consumer preference. So as we’ve guided you, we expect to see that part of the business continue to grow in the UK and internationally.

Where next, Jo?

Omar?

Thanks. It’s Omar Sheikh from Morgan Stanley. I’ve got, I suppose, three questions. First one for Andy, it’s a bit of two-parter. Sticking with Workforce, if you look at your target of ‘25, you’re talking about doubling the size of the business with double-digit margins. But really, you’re talking about increasing operating profit by about £30 million to £40 million. So is that really ambitious enough in the context of the opportunity that you talked about in the $100 billion market, for example? So that’s the first question. And related to that, if you just take a step back and look at the strategy over the last year, you’re 1 year into your transformation plan. Do you think you’re going fast enough? And how do you sort of weigh the organic versus inorganic opportunities, particularly in the context of the very strong balance sheet that you still have? And then finally, maybe for Sally on Higher Ed, I’m going to maybe try and pin you down on the revenue decline this year. I mean, it is quite a wide range. I mean, you’re saying decline better than last year. Let’s say, we’re talking about somewhere between minus 1 and minus 4. Can you give us a sense of where you think it might land, bottom end or top end of that range? Thanks.

Great. Thanks, Omar. So for your first part of your question on the opportunity for Workforce Skills, I think there is a phrase about underpromising and overdeliver comes to mind. So we have spent a lot of time in all seriousness and Mike and the team. And actually, it’s a cross-company effort. The Workforce Skills part of the business, the division we set up is part of a longer and I think you’ve got a sense of that across the company. We’ve been doing business with enterprise for a long, long time, whether it’s in PTE or Pearson VUE in terms of the credentialing. So we have a lot of experience in this area and a lot of contacts, as Mike was referring to, over 2,000 corporate clients today. We have worked very deliberately on the strategy that Mike outlined for you. I fully expect that we may be coming back to you in due course as we come to market and maybe realizing some potential upside because it is such a large market, and we believe that we have a unique proposition. We didn’t want to follow, we wanted to innovate. And I believe we’ve really truly created something that is uniquely Pearson, that really plays to our strengths. And we have seen really, really is being welcomed by corporates around the world at scale. So as we get more information, as we get more data that comes in, as we further integrate the Faethm and the Credly acquisitions into the Workforce Skills division and more broadly actually into the company, then we’re going to get a better sense of what we really truly believe that opportunity is. But as mentioned, it is a huge market. As we’re doing all of this and whether – how we use our balance sheet and as it results, I guess, two parts in terms of innovation within the company and our need to acquire new skills through acquisition. I think when I started – and actually when I first joined the Board, thanks to Sidney, what really struck me was the power of the assets that this company has today. And really, what we’ve been trying to do over the last 12 months is paint a new picture and understand which pieces of the jigsaw go into this new picture, and frankly, which pieces are missing. And we are very targeted about bringing in the right talent and the right skills into the company. The human capital aspect of our acquisitions is very, very important to me and to us as a company, in addition to the technology that we bring in. So we’re being very deliberate around how we use our balance sheet and how we look at acquisition targets and then how we can integrate them into the company. And more broadly, one of the things that maybe I hope you get a sense of today is the innovation culture that we are creating within the whole organization. I came back from the holidays, Christmas, and we meet as a group, by the way, and my other colleagues of the executive team are here in the front row, every Monday for 2 hours. Because I think it’s really important that we all share what we’re doing and we’re all aligned around what needs to be done today and also in the future. And I came back from the first meeting, I said, right. We’re going to put a woman on the moon. That was – yes. And I said that because I was really always been struck by, when President Kennedy said that in the ‘60s, how it galvanized an entire nation and really was typified, I guess, with the example of when President Kennedy was visiting NASA in Houston and he’s talking to a janitor who’s sweeping the floor who turns around to the President, who asked, what are you doing? He says Mr. President, I’m helping put a man on the moon. And we’re really getting a sense within the company of wherever you are, whatever you do, over 20,000 employees of this company are all contributing to the success, not just of their own business but to other businesses. And that, I think, is very, very powerful in creating an innovative and accepting culture to do that. I bought all of us Oculus headsets. And I do these monthly Ask Andy videos where I communicate out to all of the employees. And one of the employees saw that I had an Oculus headset on my desk behind me. They formed a tiger team. They weren’t asked to do this, and send me an e-mail 2 days ago they have created an Internet. And it’s members of – these guys and others, employees from around the world who just went, I wonder what it would look like if we went into the Metaverse. And then they send me an e-mail. And when – so Jody, if you’re watching this and the team, because I haven’t had time to reply to them, thank you. I wrote it. But there is – that’s the type of innovative culture that we are trying to engender within the company. Sorry, that was a very, very long answer. I didn’t mean to go off. Can’t remember what the other question was. I know, I know, yes. Anywhere between one and four.

Yes, you are right. I am not going to be specific about Higher Ed on a 1-year basis. But what I am going to emphasize is there is going to be growth out to 2025. I think we have given you the moving parts around enrollments, market share, secondary recapture, that course enrollment piece. And if you want to be specific, I will let you draw your own judgment anyway. Anything you want to add?

No, I think you have got it.

We are going to – can go to Katherine.

Good morning everyone. It’s Katherine Tait from Goldman Sachs. A couple of questions for me. Firstly, you laid out, as you did with Workforce, the great opportunity there is in Assessment and Qualifications and also in Virtual Learning. So, a similar question, really, why is your sort of growth outlook as sort of conservative or maybe you wouldn’t describe it as conservative as it is? Why can’t Assessment grow faster than that sort of low-single digit, particularly VUE and clinical? I understand the other stuff perhaps being slightly lower growth. But why can’t we see faster growth there? And similar for OPM, I think you talked about a 14% growth – market growth levels. So again, why are we talking about only mid-single digit in that market? Second question, on Workforce Skills, curious, the contracts that you have won recently with corporates, I would like to understand like how are you winning those. Like what is it? Are you displacing other competitors? Is it a completely new product that these corporates are bringing in, in addition to other services they have? Are they displacing in-house solutions? Just keen to understand that a little bit better. And then finally, on the buyback, if you – or as and when you are successful in selling the sort of businesses up for sale, could we anticipate further cash returns, or is that already baked into the £350 million?

Thank you very much. Have you met Bob and Art, to your first question, and that earlier response about under-promise and over-deliver? No. In all seriousness, I don’t know. Art?

Yes. Not a bad move to plagiarize the boss in the first session like this, so under-promise and over-deliver is absolutely a good mantra for all of us. We feel great about the Assessment and Qualification business. We are very proud of the track record that we have shown in delivering that steady growth. And we are planning on continuing the formula that has delivered that, the breadth of the portfolio, the coverage of the broad range of professions, things like IT have certainly pulled things upward. Other areas like traditional students admissions maybe reacted specific things like the COVID disruption to traditional admission testing. So, that whole portfolio effect is what contributes to that low to mid-single digit growth. We feel quite good about it when we add in the investments that we will be making in geographic expansion and continuing to broaden the solution set. We are quite happy with being able to stand up here and say that. And if we do, in fact, over-deliver, we will be happier still.

Perfect. Mike, do you want to touch on the…

I am going to follow Art’s example standing actually. I could talk to you about this for hours and I am not going to because we have other things we need to talk about. But just a couple of points about this market that I think are really important to keep in mind. The first one is it is highly fragmented at the moment, and it’s changing very, very rapidly. That’s creating a lot of friction and churn for companies. It also means that no company yet has really, in this new space, achieving single-digit market share. So, there is a lot of demand and expectation from customers, employers for better services and a lot of opportunity for us. So, to your specific question, the services that we are winning these contracts for are new in the market. So, the new services, for example, that Faethm provide, the new services that Credly provide, these are innovations in the market today, and they take us into a much more effective high-value future state in terms of outcomes for customers and returns for Pearson. What the opportunity for us now, having landed so many of these contracts, is to expand the revenue opportunity that we have there by integrating our products and services together and filling out some of the gaps that I mentioned when I spoke. Thanks.

Sally?

I am not going to stand up because I have got a suspicion I am going to lose my mic, if I do. So, in terms of the application of our capital allocation policy, I have looked out and I have incorporated an assumption around what happens around the international courseware local publishing businesses. The Board will always apply our capital allocation policy. Our priority is in investing in the business and driving future growth. But at any point in time, if we see the opportunity to return – make returns to shareholders, we absolutely will. And we have demonstrated that we have now.

Can I take the OPM, please?

Yes. Sorry, Tom.

Yes. So, I mean I think look, the simple answer is Rome wasn’t built in a day. So, we started off with a major reset of that business. We are bringing in a new leadership team. We are putting the foundations in place from a marketing enrollment perspective in terms of getting the funnel right. And then we need to get one with the new business development pipeline. But as you appreciate, when you are ramping up these new courses, they take time to ramp up as an investment cost required. We are doing that. And we want to be really clear. We have got the right partners where we can scale with. So, that doesn’t mean you are going to take one university online with three programs. We are talking about taking university online with the right number of programs, so you can grow scale behind the brand, leverage the brand, the university’s brand to grow in that space. Because we recognize it’s a competitive market. So, we are being very choice-full about where and how we grow. And so we are not starting off by saying, well, on day one, 14%, there we go. So, gradual thoughtful step-up approach to growth. Thank you.

The next question from Citi from Tom just in the back.

Yes. Thank you. It’s Tom here from Citi. So yes, three questions. Let’s go for it. The first one, on the guidance, it’s £417 million, which I think you have taken from consensus. But looking at consensus, it also includes just shy of £30 million for Workforce Skills. So, I mean by definition, there is an extra sort of £30 million of investment, I am just coming in somewhere. I am interested whether that’s fresh money being spent on developing Workforce Skills or whether that’s a sort of run rate of losses for Faethm and Credly that will just be absorbed by the Workforce Skills division. That’s I suppose the first question and maybe the small addendum there is if – where is conservative – where is consensus too low for 2022 as well? And then the second question was on Assessment and Qualification, just around account wins and losses. Obviously, the DVSA contract is coming out. I was just wondering whether you have line of sight on any big contracts that are coming this year just so we can just keep an eye on them. And then a final one for Tom on OPM, do you feel like you are missing out not having any big destination consumer site like edX or Coursera, or is that something that Pearson+ is going to build – sort of fill in over time? Thank you.

So, the £30 million for Workforce Skills increased investment, which we have – which I indicated, that’s a kind of mixture of both, Tom. So there are losses in Faethm and Credly, and we are also putting further, I guess organic investment into Workforce as well. And that broadly comes from capital reallocation across the other divisions, as you know, I am very cost conscious. So, there are some places where we are making savings that enable us to invest in that future growth. So, I think that probably answers the question. Anything you want to add?

Art, do you want to talk – or Bob, do you want to talk about…

The DVSA contract was disaggregated. We didn’t lose it all. In fact, we maintained about a third of what it was. But two-thirds was a hit. And when you are going to grow in mid-single digits and you lost a big contract like that, that means there are obviously some new contracts in the works. And one of them has already been signed, but they have chosen not to go public with it yet because they don’t want to stir up their – make sure they have a nice exit from the current vendor. They think announcing that will create havoc. So, that will be announced soon. And we expect several new fairly significant contracts to be signed in ‘22, which I really can’t talk about because they are in the stages of finalization. But the pipeline for the VUE business is as strong as it’s been in many years.

And also, as you recall, have that stability of the number of contracts, so a win and a loss anywhere over the overall breadth of scale of those contracts, it mitigates some of that. And Tom?

Yes. Look, I think from an OPM perspective, when we speak to university partners, they care about one thing, having high-quality pipeline of students that we can bring in for them. Obviously, to you and others can get access to that from their large base of moot-based clients. We feel good about what we are doing in terms of our marketing and enrollment funnel. We said there is a lot of opportunity there to optimize that to drive efficiency through it to get better conversion, to get the media mix right, to improve the work we are doing with our enrollment teams. So frankly, we are happy with what we have got, and we are going to make sure we deliver with that for our partners. And if we do that, we will continue to build a reputation for consistent delivery for those partners, and we will continue to grow relationships and build an excellent reputation in the marketplace. So, that’s the plan and we are sticking to it.

Susie, can you get to Adam?

Hi. Good morning everyone. It’s Adam Berlin from UBS. I have also got three questions, Two on the Higher Ed and one on Workforce Skills, if we can. So, on Higher Ed, does it make sense to target a stable margin this year? You said you are going to have declining revenue. There is obviously salary inflation in the U.S. And Andy has talked about this huge opportunity in Pearson+ and to invest in that platform. So, how are you going to do it? This is kind of the question. The second thing, following up on that, is you talked about the importance of MyLabs and Mastering, which is actually where most of the revenue in U.S. Higher Ed is today and how important that is as an acquisition funnel for Pearson+ in your strategy. How are you going to stop the decline in Mastering and MyLabs units? What’s the plan? You don’t talk about it. You always talk about inclusive access in Pearson+, which will focus on textbooks. But what are you doing to turn around that big problem that you have in that business? And then the question I wanted to ask on Workforce Skills is, could you just explain how large the enterprise sales team is today? How big does it need to get? How hard is that going to be to recruit those people in the current labor market? And what’s that like, because that’s the real challenge for lots of tech start-ups. And that would be really helpful. Thank you very much.

Thank you. Do you want to start with the Higher Ed margins and then move on to…

Yes. And then I will hand over to Tim to fill in as well. Yes, it does make sense to target those margins. We have got two things happening. We have got the revenue, please, but we have also got ongoing cost savings within the business, which we have seen in 2021. So, it’s a continuation of the things that we are doing there. As you move from print to digital, there is costs that you can naturally take out of the business. And Tim and his team are very expert at doing that. So, I am really confident about Higher Ed margin this year.

And I have just said, before Tim leads up, is about – we take a holistic view about how we spend and how we allocate our expenses across the company and how we utilize any cost savings that we are bringing in so that we are prioritizing and triaging. It’s really important that we put our money to work so that we are going to be driving growth. We are focused relentlessly on growth and delivering that. So, we don’t – no longer look at just a segment by segment by segment. We are really thinking around, okay, this is in totality how much we spend on these different aspects on a day-to-day basis, and these are the areas. You have heard some areas in terms of Pearson+, Workforce, Jio’s World. The real answer, all of these businesses are constantly innovating, constantly investing. But what we do, where we have opportunities to optimize our operations is then how – where is the best way to allocate our funds. I think it’s just very important you understand that’s how we see that. But Tim, do you want…

I forgot to pick up on the Pearson+ funds. I am sorry, Adam. I really will let you have a go, Tim. So, we have got investment in Pearson+ in 2021. We have got it in 2022. It’s just kind of not an incremental piece because we already had it.

We built that in. That was kind of more eloquently said. That’s what I was trying to say. Go ahead, Tim.

Yes. I appreciate the question. So, I mentioned three key drivers for the Higher Education business, the headline level, which is enhancing those core products, which I will come back to, accelerating secondary recapture and scaling Pearson+ in a way that can expand our addressable market. All three of those are not aspirational, they are operational and they are well underway. So, now double-clicking on the enhancement of the core products, MyLab and Mastering, to put a finer point on what we have done and what we are doing. The migration to cloud, as I mentioned, will essentially be complete this year. That’s a very significant undertaking that will support reliability and stability. You can call those table stakes, but it’s a heavy lift from an execution standpoint. So, almost done this year. Point two, about convergence. Again, that is bringing the MyLab and Mastering platforms to a single application, right, so common UX framework, common services that will, in turn, bring a consistent user experience and a much faster innovation cycle. So, our ability to respond and remain or be – gain competitive advantage is supported by that. That convergence will be completed over this period. It is underway. You have to step by step through one application at a time, you deconstruct the services. So, it’s been underway and it will be complete within this period. And point three is we have a roadmap of features that are aimed at improving the learner experience. So, improved adaptivity, improved interactivity, more integrated learning experience. All these things, we are very close contact with both faculty instructors and on the student side of things that will, again, both maintain our competitive position or improve it. So, those are the reasons we believe that, that core product suite will remain competitive. The other issue we have seen in the last couple of years is they were designed – they are very anchored on lower-level undergraduate courses. When we introduced them 20-years-ago, their faculty productivity tools for one, which means people use them in large-scale courses because they bring faculty productivity. Those have been under significant pressure over the last 2 years, where undergraduate moments are down 6%, right, in the U.S. So, I think a lot of the volume pressure we are seeing is a reflection of the enrollment environment, which we don’t control for, but we don’t expect to be as severe on the outlook. And while we can’t predict it, we might see some improvements in there. So, that’s the reason why we believe that, that set of core franchises will remain an essential part and a reliable part of the portfolio and the revenues and profits.

And to be clear, we see no erosion in our share, to just your earlier points. Mike?

Great question. So, three parts of the answer to this. So, I mentioned we have integrated our smaller, faster-growing assets into the Workforce Solutions business, so that’s three of the existing Pearson business units plus the two acquisitions. So, that’s a new single integrated go-to-market structure that we are creating out of that. So today, less than 100 in terms of people working in the sales and marketing function. But we are structuring that and executing that in a different way than Pearson has in the past. The second thing I would say just is partly it’s about the acquisitions. So obviously, with Faethm and Credly, we have brought in some very talented people on the go-to-market side as well as on product development and data, particularly in the B2B SaaS business model space, which is going to be a key driver of revenue for us. Great unit economics, highly scalable, big part of what we are going to do. But then the third part, and this is really interesting, is really the appeal and the offer and the story that Pearson has. So, I think a lot – I am recruiting at the moment. If any of you are interested, see me afterwards. But there is a lot of people from that B2B SaaS world very attracted to the purpose that Andy is bringing and that we have talked about today, but also the opportunity they see as sales professionals in our growth story. So, it’s a hugely competitive labor market out there for sure, but we have got a great offer that we are finding is very appealing to people.

[Indiscernible]

Thank you. It’s Sarah Simon from Berenberg. Maybe just two questions on Pearson+. So, in terms of the 2.75 million users, that’s a December figure, if I am not mistaken. So, now that we are halfway through a new colored semester, how has it trended since and any indication on the number of paid users within there? And maybe one on Credly as well, could you just maybe talk about maybe compared to LinkedIn, you can sort of qualifications on LinkedIn credited and everything. So, just the difference in use cases between Credly and LinkedIn?

I will take your – the first question on Pearson+. As I mentioned in my remarks, we are going to focus on releasing both registered user numbers and subscriber numbers twice a year. We are going to do it at the end of the calendar year, i.e., we report at year-end and at interims. So, the next update you should expect is at our interim presentation. I will say that there has been healthy growth, shall we say, since that number at the end of last year. But we will be getting into more details around both of those numbers and get into that regular cadence so that we are mirroring both the calendar and fiscal year, but also then the academic year, so that we are giving you accurate numbers at the end of each of those periods. Mike, do you want to talk Credly?

Sure. I mean there are great synergies actually between Credly and LinkedIn. And many people will communicate their Credly credentials on LinkedIn. So, that’s one of the application areas. I think the difference to think about here is two. LinkedIn, obviously is fundamentally a social platform for professional work. Think of Credly as the data layer for skills. That’s the first difference. And the really key thing is around verified skills. So, LinkedIn has got some great technology, working very hard to bring an element of verification to what we in the room say about ourselves on LinkedIn. You can query how accurate some of that data is. I am sure we are all completely honest about what we have said, we have done in the past on LinkedIn. Credly is a verified skills deck space. So, if you have a Credly badge, you can take that to the bank. It tells you as an individual that helps you also communicate what you can do. But as a consumer of those skills, as an employer, for your employees within your enterprise and you are thinking about how to make use of them or if you are seeking to recruit new employees, Credly gives you an accurate verified picture on skills. That’s the big differentiator.

I would like to add one quick statement to that. I was on the Credly Board. As you know, Pearson owned 20% of that. And one key differentiator is that Credly badge tells you what you can do, not just what you know. There is a lot of difference between what you know and what you can do, and the Credly badge verifies that you can actually do something, not just know about it.

Good point. Jo?

We have a couple from online. Sally, for you. Matt from Credit Suisse. How much M&A revenue is in the 2025 guidance? And are you looking for stable margins in ‘23 as well as ‘22?

So, we have got both – I think it’s probably the answer to the question I had earlier. So, in 2022, I have given you the breakdown both for the organic or the existing business in 2021. Then I have given you the growth rate for both Faethm and Credly. And then for ‘22 to ‘25 onwards, that’s included – it will be within the base and then for 2023 margins, so the margin for 2021, 11.3%. Could that mean that the margin for 2022 rounds up to 12% rather than 11%? Absolutely, but broadly stable.

Thank you. And another one from Sami from Exane. Mike, I think it’s for you for the first one. What is the annual revenue base of Faethm and Credly from which you are guiding for 4% revenue growth in 2022?

Today, about £25 million.

Perfect. And Tom, one for you, how much of the COVID cohort are you planning on retaining in full ‘22? I think that virtual schools.

It is indeed. So I mean, I think the first thing to say is we have grown 33,000 students over the last couple of years as a result of the COVID cohort and interest in virtual schools increasing. Two things are different this year. One is that in the ‘21, ‘22 school year, we had a lower proportion of new students. So, we have a lower retention rate for new students versus returning students. So, that mix has changed positively. And then secondly, in our new students in 2021, about a third of them said their principal reason for coming was COVID. And in 2020, that was around 50%. So, you have got a proportionately better mix in terms of new versus returning, and you have got a proportionately fewer number of students in terms of COVID being the principal reason they were coming in terms of new students in the first place. So, you put all of that together and then you can back out the difference between our guidance for 2022 and then ‘23 to ‘25 in terms of the difference that that’s having on our year-over-year growth rates.

A question from Nick.

Hi. This is Nick from Artemis. Good morning everyone. Thanks very much for really interesting presentation, helping us build out an understanding of where you are taking this business. When we look at it, we can see the opportunity to go from being, let’s say, a higher education publisher to a global learning media company. And you talked about the jigsaw pieces and then the picture that you are creating. To get there it’s going to take an ability to create compelling content that people really want and value. And that’s an element of magic, which is – we have seen in businesses like Disney that is a bit harder for investors to imagine. So, can you give us some explanation of where your confidence comes from, that you have that content heritage and culture and capability within Pearson that you believe you can execute and create that compelling product and service for your users around the world?

Great question, Nick, and thank you for raising it. I think one of my first presentations, I have said intellectual property, IP, is really at the heart of this company. And as you would imagine, given where I have been in the past, I am a strong believer in the power both of intellectual property and of brand. And whether that’s in the past, our 3,500 authors in the Higher Education business who created intellectual property in the form of a textbook through to what we are doing in English Language Learning, the intellectual property that we create across all of our businesses, the 5,500 teachers that we have in our virtual schools business and the bespoke curriculum that is our intellectual property that we create in Connections Academy, across this entire range of businesses, intellectual property and the people who create it and the people who go search for that talent to create the next generation or next iteration of intellectual property is fundamental to our success across the business, whether that is through an acquisition such as Clutch Prep that Tim mentioned today, all the way through to, constantly, we have teams in each of the divisions whose sole job is essentially talent spotting, finding talent, attracting talent, nurturing talent and then delivering and creating compelling quality trusted product that learners want. That’s how we have won in the past, and that’s how we will win in the future. It’s that marrying of intellectual property with the technology and the developments in technology that are enabling us to create direct relationships with consumers. I hope that helps.

Yes. It’s about the magic of the content, as you say, and as Andy has explained. It’s also about the magic of the algorithm in these global media companies. And we are connecting Pearson through the services that we are developing the acquisitions that we are making. So, Faethm and Credly, as Andy mentioned, the capability they have as diagnoses, as recommenders of pathways of content has applicability across the whole of the portfolio. And what that will allow us to do as well as bringing compelling new content to market to meet the specific needs of our learners in a Pearson+ environment, for example, wherever they are in life, it also allows us to gain much greater value and scale for our existing content because we have got great content – locked up is maybe too strong a word, but in use cases, which we can dramatically expand through that connectivity as well.

And just to build on Mike’s point, we have got a new curriculum that we are building the Virtual Schools space that is aligned to the world economic framework, skills ontology. Guess what, Faethm is very closely aligned to that in terms of its own understanding of Workforce Skills. So, that can all be aligned. We are building that content in a different way. So, it’s modular. It does not – you don’t think about it as a textbook, think about it as a database of content, which gives you a very clear learner feedback so you can understand performance from students in terms of how they are doing. You can then take Clutch Prep, which is an assessment qualification. You can then start thinking about how you provide a broader service to virtual school students because of the range of the things we can offer. And then you can think about the relationship with virtual schools and workforce, for example, as we are thinking about making those linkages up and down in terms of the lifelong learning value. So, I think there is a great content. There is cross synergies. And then there is the aging stages of the organization and how we bring that together.

The amount of data that we are receiving, and we have referenced a bit around the importance we see and the opportunity we see with data across the company, how we manage, how we utilize and how we use data not only to inform us on how to improve our products and our content and our IP, but also to help the learners. One of the things that struck me recently was the use of – our data is a predictive tool. If someone comes in to the beginning of their high school or their college life or university life, and we are able to follow their – what they are studying over a 3-year or 4-year period, we can help students answer that main question they have. So, what the hell can I do with this degree? What jobs are available? And if we know and through Credly, we can also then say, “By the way, if you took this credential or this badging, that’s going to help differentiate you in the market.” And we can – if for example, we thought you were good for a marketing role, and there are enterprises who are looking for 100 marketing graduates, we have data on tens of thousands of potential recruits into that marketing world. So, this is another way to think about Pearson VUE. I went into a High Holborn Pearson VUE Test Center a few weeks ago and there was a bunch of candidates taking a nursing exam. Now, if you think about it, we know there is a bunch of individuals who want to become nurses before anyone else. So, how we leverage those insights across the company and across a consistent data layer and a common identity, I think is something that’s very, very interesting.

Question from Simon from BNP. Andy, for you, does the business have an indication of what good best case scenario looks like for growth and margins?

Does the...

Business have an indication of what good, best scenario case would look like for revenue and margins?

Well, aside from the financial metrics that we have in place and the non-financial KPIs. We have a relentless focus and rigor and transparency around how we are operating. And we share when things are going well. We understand what are the levers that are generating that success. And if there were any challenges, we know then how to address them and become – move with agility. And then you layer that into it. So, it’s almost like an intuitive management. That’s why we meet together for two hours every Monday morning because you can get a certain amount of information from the numbers and a lot of those numbers are generated. We have the forecasting of – accurate forecasting that feeds into various – the models within Sally’s team, very, very important. But there is something about understanding at an early stage what’s working or what not is working or what we need to change and what we need to improve. I am not sure whether I m getting at the essence of the question, per se, or if anyone wants to add. But that’s how I interpret how we are managing the company as a whole above and beyond the pure numbers.

I will just add to that maybe a bit more directly. We have laid out what we feel is a base case of what we expect from ourselves here. We would hope to improve on that. And Pearson+ should give us the vehicle to do so.

Yes.

And I will hand back to Andy, I think.

Okay. Well, thank you very much. If you are watching online, I appreciate the – taking the time out of your day. And particularly for those of you who have made it into 80 Strand this morning, I greatly appreciate your interest in our company. We are all here. There will be product demonstrations for both Faethm. There are some folks here from Credly as well as the Pearson+ team. So, you can – we are doing it in groups and in individuals. So, for those of you who are interested in any of those elements, any other questions that you have that you haven’t had the opportunity to raise now, we are all here and at your service. So, thank you very, very much. And I believe there may be refreshments for those of you here outside. Thank you.

Thank you.