Digital Learning - Pearson

05Section 1 OverviewOverviewGovernance at PearsonLeadership & Board members challenge anddebate strategy, performance,responsibility and accountabilityto ensure that the decisions wemake are robust. Board activity andperformance is assessed annually.Detailed risk assessment andmanagement information shapesall strategic and operationaldecisions, with clearly definedboard and managementresponsibilities and processes.Building strong relationships withour diverse stakeholders is crucialto our sustainable success. We aimto engage through many forums,and channels, to build trust.Our remuneration policy alignswith strategy and adapts to marketconditions and performance.Sidney Taurel ChairmanPTotal shareholder return: Five years % change-15.6%Pearson-15.6FTSE 10054.5FTSE All-Share61.8FTSE All-Share Media126.2STOXX 600 Media107.3Five year TSR in 2016 was -15.6% which compares to a 54.5% return onthe FTSE 100 Index of large UK listed companies. Our recent sharepriceperformance has been disappointing but we are confident that theplans and strategy laid out in this report will make Pearson a simpler,stronger company, and that they set the company up for a sustainedperiod of growth and value creation.'LYLGHQG SHU VKDUH LQ ȴVFDO \HDU 45.0pGovernanceWith market leading positions, and the mostwidely used digital products in highereducation, Pearson is in a strong position toweather the storms better than others, andbe the leading digital education company.Key performance indicatorsOur performanceDigital offers significant opportunities forcompanies involved in education – areas likenew digital services for universities, onlinedegree programmes and virtual schools giveus much more long-term growth potentialthan the traditional textbook. The board isconfident that Pearson is well-placed toseize these opportunities in the long term.See our Governance reporton p56–81Our strategy in actionEducation is a crucial sector which requiresimprovement right around the globe.We draw great confidence from the factthat Pearson’s products meet the needsof millions of students and teachers everysingle day. We already have world-classcontent, world-class authors and an abilityto work at scale that is unparalleled in thesector. We have maintained our leadingshare of content.See our Remuneration report onp82–106We held dividends flat at the 2015 level at 52p per share. The dividendwill be rebased in 2017 to reflect portfolio changes, increased productinvestment, and our outlook for 2017.See our non-financial KPIs on p37Financial statementsSee our other financial KPIs on p30-33

06Pearson plc Annual report and accounts 2016CEO’s strategic overviewS“The long-term opportunityin education remainshugely significant.”John FallonChief executiveDear shareholders,2016 was a tough year for Pearson. We sawour biggest market – US higher educationcourseware – shrink again, as a result ofthree factors: declining college enrolments,changes in the buying patterns of studentsand a correction in inventory levels carriedby distributors and bookstore chains.In retrospect, we failed to see theaccelerated level of disruption taking placein the US market. This disruption affectedthe whole sector, not just Pearson – butled to an 18% underlying decline in revenuesfor our largest business.We announced in January 2017 that wewould not achieve our previously set 2018profit target, and will rebase our dividendfrom 2017 onwards.We also announced a number of steps toaccelerate our digital transition, protectingexisting revenues and growing new ones,while managing the ongoing decline inprint sales.We will weather these challenges as well as,if not better than, our competitors. Digitalnow represents 50% of Pearson’s highereducation courseware revenues, and isgrowing steadily, even at a time whencollege enrolments are declining. By theend of this decade, the balance will be 75:25.Our digital higher education products areroughly twice as popular as those of ourcompetitors.As a natural consequence of our lowerprofits expectations, we have also takena significant non-cash write-down ofgoodwill of 2,548m, as part of our annualimpairment review. The goodwill relates toThree key trends in our markets1our North American businesses, and inparticular the 1998 acquisition of Simon &Schuster Education and the 2000 acquisitionof NCS.All this has been difficult for Pearsonshareholders. However, we remaincommitted to returning the companyto growth and to building a stronger,more durable business.Pearson has demonstrated competitivespirit, resilience and progress on manyfronts even in the tough conditions notedabove. We performed well in our majormarkets and announced a number of newdigital products and new partnerships tohelp reach more learners. We delivered ourrestructuring and cost savings programmein full and, thanks to careful costmanagement, hit our 2016 profit goal.S23CVOnline educationPersonalised learningEmployabilityTo meet the demand for more flexible,digital and effective education, schools,colleges and universities are increasinglyseeking partnership models which enablethem to reach more learners, scaletheir teaching online and improvetheir productivity.Through the move to online education, rapidadvances in technology are also enablingindividual, adaptive learning to take placeat scale. The rise of artificial intelligence andvirtual reality in the classroom brings excitingnew opportunities for learners, schools,colleges and educators, and will help increasestudent engagement and course completionand, ultimately, improve learning outcomes.In a world where 500 million people are outof work but four in 10 employers are unableto find qualified candidates to fill open roles,the link between learning and earning is morecrucial than ever before. Students are focusedon gaining the skills they need to get betterjobs and more rewarding careers, whilere-skilling and up-skilling are taking placein the shifting digital economy.

07Section 1 OverviewOur strategy canbe expressedas an equation:CONTENTWe are creating an increasingly digitaland services-based business. US studentassessment contributed more in profit thana year ago despite a 22% underlying declinein revenues.Pearson’s strategy – 100% focusedon educationThe long-term opportunity in educationremains significant. Around the world,500 million young people and adults areout of work, yet 40% of employers areunable to find qualified candidates to fillopen positions.1 The social and economicchanges being wrought by technology,ageing populations and globalisation willonly increase the value of high-qualityeducation. Much of our work relates tomeeting these new needs – whetherthrough our vocational qualificationsand apprenticeship programmes in theUK, or offering workforce developmentpartnerships to some of America’slargest employers.Pearson serves the needs of millionsof students and teachers by combiningworld-class educational content andassessment with the promise of newtechnologies and cutting-edge neweducational services.In 2016, Pearson continued to investsignificantly in research and expertisefor education products. Our courseware –educational materials, in print, blended anddigital formats – now combines the verybest content with learning design andtechnology to create great user experiencesand better learning outcomes. Our MyLabssoftware now adapts to prompt collegestudents with hints about what to studynext, and gives early alerts to teacherswhen their students are in danger offalling behind.Governance1. The Economist, April 2013.How our strategy creates valueOur performanceThis report highlights a number of ways weare drawing on the potential of technologyto make meaningful improvements tolearning, alongside our partners.Powered by services and technologyOur strategy in actionWe have made our emerging marketGrowth businesses profitable again, witha more durable platform for future success.In our Core business – incorporatingmarkets such as the UK, Australia and partsof continental Europe – we are managinga huge programme of change in UKqualifications, and setting the businessup for future success. We are growing wellin virtual schooling, online degrees foruniversities, and English language testing;all promising parts of our future.More effectiveteaching andpersonalisedlearning atscaleASSESSMENTOverviewWe are achieving important synergiesacross Pearson in terms of our productplatforms and enabling technologies –helping to run the company more smoothlyand efficiently.SOur goal is to improve access and outcomes in education through our world-class capabilitiesin educational content and assessment, powered by services and technology.Short-term prioritiesControl costsInvest in the biggest opportunitiesin educationDevelop digital & servicesSee p14-15Build market presenceSee p16-17Deliver measurable outcomesSee p18-19Sustainability plan 2020Our constant goalsOur strategy will deliver growth by:building a sustainable business;being a trusted partner; andreaching more learners;to create long-term value.See p20-27Financial statementsSimplify our portfolioStrategic growth drivers

08Pearson plc Annual report and accounts 2016CEO’s strategic overviewSOur qualifications and assessment servicesare cutting edge. We help to measureprogress and analyse insights about theachievements and abilities of learners allover the world. In 2016, we ran 23.6 milliononline tests in the US alone – and helpedteachers create millions more of their ownshort, formative assessments, to checkstudent progress and learning.Our digital teaching and learning servicescombine these capabilities and focus onextending educational access and improvingoutcomes – through virtual schools andonline degree programmes, we are creatingdigital products that are more reliable andenjoyable for the students that use them.These will in turn create new opportunitiesto grow.The process of making, selling and servicingour products means that we are in dailycontact with more educators than anyother commercial organisation in the world.We understand the realities of runningschools and universities, and teachingstudents of all ages and backgrounds.That understanding means Pearson is wellplaced to assist schools and universitiesin their transition from analogue topredominantly digital learning.Personalised learning in actionThe digital opportunityOur products are increasingly driven bythe concept of personalised learning, andour goal is to help educators reach everystudent in a way that meets their individualneeds. New technologies are enablingPearson to make personalised learninga reality for millions of students andteachers: analytics, which provide decisionmaking insights to teachers and students;adaptive capabilities, that intelligently adjustto the needs of each student based on theirknowledge, skills, attributes or behaviours;and implementation services, that supporteducators to successfully integrate digitaltools into their teaching.The colleges and universities with whomwe work still teach primarily face to face,in physical buildings, which limits theirown scale and reach – but this is starting tochange. Technology now enables them toreach far more students, with teaching andlearning happening virtually, online, as wellas in the physical classroom.Millions of students already experienceadaptive learning every day with ourproducts, but we have major plans to stepup these capabilities. In October 2016,we announced a partnership with IBMto integrate their advanced cognitivecomputing capabilities into Pearson’sproducts. Together, we plan to providecollege students with a virtual tutor,powered by artificial intelligence techniquesto help increase engagement, provideeducators with better tools and ultimatelyhelp drive completion rates. We will bepiloting the product in colleges acrossAmerica in 2017 – and over time we seethe potential to reach millions of studentsaround the world with better, moreengaging teaching.We are partnering with universities on threecontinents with services including courseand programme design and development,student recruitment and retention, andrelated platforms and technologies. Theseservices help our partners reach morestudents, ensure more of those studentsare successful in their studies, and helpthose partners run their operationsmore effectively.We already have more than 40 of thesepartnerships in the US and Australia.In 2016, we began our first online degreepartnership in the UK with King’s CollegeLondon, helping to create online master’sdegrees in Psychology and Law. We expectto announce further partnerships withleading universities in 2017.Executive teamWe are managed by a board of directors and I, as chief executive, am responsibleto the board and lead through an executive team.Coram Williams Chief financial officerAlbert Hitchcock Chief technology and operations officerMichael Barber Chief education advisorKate James Chief corporate affairs and global marketing officerstepping down in March 2017Bjarne Tellmann General counsel and chief legal officerTim Bozik President, global productjoined executive in 2017Rod Bristow President, core marketsBob Whelan President, assessmentsKevin Capitani President, North AmericaMelinda Wolfe Chief human resources officerGiovanni Giovannelli President, growth marketsFor more on our governance structure, see p63

Section 1 OverviewPearson needs to achieve a number ofimportant goals in 2017 to fuel our returnto sustainable growth.Across Pearson we have strong businessesdelivering steady profits in educationalcontent and assessment. We have otherswhich are growing fast from a smallerbase, meeting new needs as educationitself evolves.We are creating a more digital, services-ledcompany that can maximise opportunities– and mitigate threats – by makingeducation more accessible, affordable andeffective for far more people. We are makingPearson a more efficient company, withdigital services that support a newgeneration of personalised learning andwhich create subscription-style businessmodels for us to renew and repeat sales.Our recent announcement of ourintention to exit our 47% stake of thecombined business reflects anintention that we will now focus entirelyon our education strategy.Should Bertelsmann choose to buyPearson’s stake we will reinvest theproceeds to maintain a strong balancesheet, invest in our business and returnexcess capital to you, our shareholders,while retaining a solid investmentgrade credit rating.This is challenging, but exciting work.Pearson will continue to focus on fewer,larger opportunities, to manage our costbase tightly and to make Pearson a simpler,more efficient company. Over time, we willdeliver a more sustainable, more profitablebusiness, delivering better educationaloutcomes for learners.GovernanceThank you for your support of Pearson.John FallonChief executiveLearn more aboutour Strategy in actionon the following18 pages.Financial statementsOur employees bring diverse talents toPearson, and learning and social impactmatter for our staff as much as those weserve. In 2017, we will continue to identifyand retain the best talent across Pearson,building a talent pipeline for key roles andpromoting employee programmes thatcontribute to career development. We arealso intent on building Pearson’s culture andour brand, which we relaunched in 2016,to position Pearson as a force for good withall the stakeholders with whom we work– recognising the value of our core businessas much as our important partnershipsthrough Project Literacy and with Save theChildren, Unicef and others. You can readmore about this on p20.2016 was a challenging year for Pearson.We have been hit hard by pressures in UShigher education, which will continue into2017 and 2018. We are acting quickly to builda more sustainable, digital business lessexposed to volatility.Penguin has been an important partof Pearson for many years, and ourdecision in 2012 to combine it withRandom House, creating the world’slargest consumer publisher has beenvindicated by its continued creativeand commercial success.Our performanceHaving made Pearson a more focusedbusiness and lowered operating costssignificantly over the past three years, wewill also continue to make Pearson simpler,more efficient and effective. We will furtherrationalise our platforms and tools, supplychain process and property portfolio;improve our efficacy and the speed withwhich we launch new product features; andensure our digital and marketing capabilitiesare optimised and effective. Theseinvestments in stronger simpler platformsand in better learning outcomes should allcontribute to better user experiences for themillions of teachers and students we serve.You can read more on our approach tosustainability on p20-27 and our efficacyreporting commitments on p18-19.The year aheadPenguin Random HouseOur strategy in actionOur competitive performance has beenstrong even in the face of market challenges– you can read more about this on p38-43.In 2017, we will be focused on holding orgaining share in all our major markets –from seeking improvements in US highereducation to building on the rapid growthwe have achieved with virtual schools,online degrees, professional testing andthe Pearson Test of English.The achievement of these core aims will helpus to meet our financial targets: achievingour 2017 budget, investing in Pearson’sgrowth, maintaining our financial strengththrough a period of change and volatility,and improving returns to shareholders.OverviewOur priorities for 201709

10Pearson plc Annual report and accounts 2016

Section 2 Our strategy in action11OverviewOur strategyin actionSIn this sectionOur business model14Develop digital & services16Build market presence18Deliver measurable outcomes20Sustainability plan 2020Governance12Our performanceOver time, this strategy will provide us with a largermarket opportunity, a sharper focus on faster-growingmarkets, and stronger financial returns.Our strategy in actionPearson’s strategy is to combine world-class capabilitiesin content and assessment with technology and services,to enable more effective teaching and personalisedlearning at scale.Financial statements

12Pearson plc Annual report and accounts 2016Our business modelOur inputsFinancialFree cash flow fromp

About Pearson Pearson is the world’s learning company, . instruction at all grade levels. 274,361 Revel registrations in 2016 14.9 million summative tests delivered through a network of 8,000 test centres GCSE (9-1) Combined Science Specification Pearson Edexcel Level 1/Level 2