Hello, and welcome to today's Pearson interim results. All participants will be in listen-only mode, and afterwards there will be a question and answer session. Just to remind you, this is being recorded. Today, I'm pleased to present John Fallon, CEO, and Sally Johnson, CFO. Please begin.
Good morning, everybody. Thanks for joining us. As you just heard, I'm John Fallon, and I'm here in London with Sally Johnson, our CFO. We're joined virtually by members of our executive team, Tim Bozik, Rod Bristow, Gio Giovannelli , Albert Hitchcock, and Bob Whelan. Tim, Rod, Gio, and Robert lead our North American Courseware, Global Online Learning, International and Global Assessment businesses respectively. Albert is, of course, our CTO. As you'll have seen from the press release, there are a lot of great things happening across the company. I'm keen for you to hear directly from the colleagues who are making them happen when we get to the Q&A. Before Sally takes you through the financial results for the first half of the year in more detail, let me share with you what I think are the key headlines.
First, the impact of COVID-19 has had a major impact, especially on our Global Assessment and International businesses. The worldwide closure of schools and professional testing centers, and their subsequent reopening to limited capacity, has hit first half sales and profits by around GBP 260 million and GBP 140 million respectively. Things are improving. June was better than May. We will, of course, all be living with considerable uncertainty for some time yet, and we are running the business on that basis. Second, the lead indicators of digital take-up are encouraging. For example, in the last three months, applications to online university programs are up significantly year-over-year. Virtual school applications were up 61% in the first half of the year, with retention rates also trending favorably. In U.S. higher education courseware, digital registrations, including e-books, are up 5% year to date and up 10% since March.
In July, new digital course creations by faculty using Pearson platforms are also up. Internationally, MyEnglishLab users have increased by over 40% year on year. In these unusual times, translating these leading indicators into future enrollments and revenues is more difficult to predict. Colleagues across Pearson are confident that we're seeing an accelerated shift to digital that will outlast the pandemic. Third, the purpose, speed, grit, and ingenuity with which thousands of Pearson colleagues around the world are stepping up through the pandemic will ensure that all parts of the company are well-placed to emerge from it in a stronger competitive position. For example, in recent weeks, we've won two new school assessment contracts in the U.S. and are building a stronger pipeline of new opportunities.
We've delivered a more than eightfold increase in online proctored tests at Pearson VUE to 580,000 in the six months to June, and a 33% increase in the use of our digital platform by psychologists using our clinical assessments. This will continue to enhance the competitive offerings of both businesses well beyond the pandemic. In international, we've hit the ground running in the Pearson Test of English in China, far faster than our competitors, doubling test bookings on the same month last year. Our track record in Egypt, online testing volumes, excuse me, rising from around 5.9 million in the whole of last year to around 19.8 million in the first half of this, is attracting attention from other countries looking to follow their lead.
In North American Courseware, we've been scrapping for adoption deep into July, when normally the season would be well over by now, and we have now taken back most of the points or so of adoption share that we gave up last year. The support we're offering to colleges as they move to hybrid learning at scale, building services from our courseware or bundling services from our courseware and OPM businesses, puts us ahead of the field, and the pandemic has not distracted us for a moment from delivering on time and plan both a new fully digital experience for enrolling OPM students and on the Pearson Learning Platform roadmap that we shared with you in February. Both will bring major competitive advantages and plenty of new opportunities to grow.
As Sally will explain, as well as making the discretionary cost savings vital to mitigate the impact of COVID-19, we're continuing to simplify Pearson and make the company more efficient, so we ensure that the cost of running the company benchmark favorably against a wide range of peers. The actions we've taken have enabled us to emerge with our strong balance sheet intact and with enduring competitive strength. With ample liquidity and signs of a trading recovery, we are declaring an interim dividend in line with last year. With that, I will hand over to Sally.
Good morning. John has already taken you through the headlines, so let me walk you through each of the segments, starting with sales. Global Online Learning was up 5%, with strong growth in Pearson Virtual Schools and slight growth in OPM as expected. Global Assessment was down 27%. That is due to the closure of test centers and schools, which are now reopening. North American Courseware was down 14% due to the expected performance of U.S. higher education courseware, also the impact of COVID-19, particularly in Canada, where schools were closed. International was down 23% given global test center and school closures, which lasted longer than originally anticipated. Turning to profit. Global Assessment and International profits were both down, which reflects the drop-through of COVID-19-related trading pressures, including moderate write-offs for stock obsolescence and bad debt. These trading pressures were partially mitigated by cost savings.
In Global Online Learning, the profit impact of sales growth was more than offset by the investments we've made as we target growing markets. In Pearson Virtual Schools, we've invested in our teaching platform and curriculum development, as well as enrollment and customer care support. In OPM, we're continuing to invest in the early stages of new programs. We implemented a new digitized enrollments platform, which would enable us to reorganize part of the business, which incurred severance costs. We saw the margin impact as discontinued programs came to an end. North America Courseware profit was impacted by the sales decline drop-through, partially offset by restructuring savings. Enabling Functions cost continued to reduce through restructuring, as well as discretionary cost reductions, given the current circumstances. Our share in PRH was sold at the beginning of April.
There is a small profit impact relating to Q1, given the business was held for sale at the year-end. Here, you can see the usual profit bridge for the group as a whole. The profit impact from COVID trading pressures offset by cost mitigation was GBP 140 million. There were expected profit impacts from trading and inflation. Our other operation factors are predominantly the online learning investments I mentioned earlier, and we saw reorganization savings of GBP 35 million. Disposals relate to PRH and US K-12. What can we expect in H2? Obviously, there are still a lot of uncertainties, both in terms of lockdowns and how recent impacts might impact future behavior, particularly in terms of university enrollments. In many parts of our businesses, things are starting to return to a new normal. Test centers have largely reopened in a socially distant fashion, but with extended opening hours.
Children are starting to return to school, while universities are planning returns to campus or hybrid models. As you can see from this slide, while April and May were very difficult, June starts to see improvement. We are also continuing to see strong interest in online and digital learning. In our Pearson Virtual Schools, applications are up year-over-year by 61%. This should translate into enrollments and revenues for the 2021 school year. Although the reaction in OPM was a little slower, we're now seeing applications in ongoing programs rise there, too. In U.S. higher education courseware, we're seeing growth in digital registrations and Inclusive Access deals, as well as lead indicators, such as course creations. This will partially offset the expected declines in print sales. Turning to each division. In H1, Global Online Learning saw 5% growth.
In Virtual Schools, we've worked hard to increase capacity in anticipation of good enrollments for the 2021 school year, given the application data I just mentioned. We're also seeing improved retention rates, all of which will benefit from the investments we've made in platform, curriculum, and enrollment and customer care support. Looking further ahead, we also see potential for new school districts and states to accept virtual schooling for the first time, opening up the chance for more parents to choose this form of education for their child. We also see potential and are starting to pursue international opportunities. In OPM, we had always planned to slow revenue growth this year to pivot the model towards programs and partnerships with the best potential. We've started to combine OPM partnerships with digital courseware relationships, and we're also investing in platforms that help students to find the right pathway for them.
A short course, a longer course, an online degree or certification, or a mixture of a few. Combining in this way supports lifelong learning and enables us to make the most of our spend and improve profitability. Over the longer term, we expect Global Online Learning to grow mid to high single digits with improved margins. This will be driven by three things: increased awareness and demand for Virtual Schools, growth in undergraduate enrollments and employability-linked offerings, as well as a sustainable operating model in OPM. Global Assessment had a difficult first half. Physical locations had to close, we shifted operating wherever we could to online assessments and proctoring. In clinical, we moved to our telepractice digital service. Many test centers across the world have now reopened, with social distancing in place and longer opening hours to start to meet pent-up demand.
We expect to see recovery for Pearson VUE in the second half of the year, presuming any second waves are not extensive. Schools are also starting to reopen, more slowly, we anticipate student assessments and clinical will likely have a further modest impact in H2 in comparison with last year. Looking further forward as testing resumes in 2021, we have retained and won key new contracts. Over the long term, we expect low to mid single-digit growth in Global Assessment with stable margin as VUE continues to benefit from the desire to demonstrate employability and as our strong track record in winning share and student assessments continues. John is going to discuss North American Courseware further, I'll touch on the key points. First of all, the H1 US HE Courseware decline was as expected, with the main COVID impact in Canada due to closed schools.
We continue to expect further declines in print revenues and unbundling of packages partly offset by growth in digital with the associated year-end phasing impact of deferred revenue. As this becomes an immaterial part of the business, our digital growth will recapture the secondary market. Digital KPIs, as I outlined earlier, are trending well, and we will use the shift to digital amongst other things, to improve profitability. In international, the closure of test centers and schools, including language schools, affected courseware sales and Pearson Test of English. International qualifications were canceled, and our Brazilian English franchise business was impacted as premises closed, though they quickly switched to virtual services. In H2, we expect the international business to recover, presuming any further COVID lockdowns are not extensive.
Looking further ahead, we see opportunities in employability as well as Pearson Test of English, where we've now been approved to deliver testing for UK Visas and Immigration. Longer term, we expect this business to grow low to mid-single digits at current or moderately improved margins. Enabling functions costs have reduced by 19% in H1 through the impact of our restructuring programs as well as discretionary savings. Our enabling function costs are those that support our entire business and each of our divisions in proportion to their size. They include enterprise technology, applications such as our ERP and CRM, finance, services from collecting cash through to forecasting, HR, everything from payroll to learning and development, and legal as well as corporate functions. We have an ongoing focus on cost competitiveness.
With the further GBP 50 million of savings in 2021, will we reach top quartile when benchmarked externally for every cost category, with the exception of technology, which will be in line with the median. Obviously, there continues to be much uncertainty. For the business overall, based on our current assessment of the trends experienced over the last few months, we are on track to deliver adjusted operating profit broadly consistent with market expectations, presuming any further COVID-19 lockdowns are not extensive. Cash flow was as expected, given reduced profit. The higher operating cash outflow in H1 2020 compared to 2019 was lower due to lower profit, partially offset by reduced bonus payments. Working capital has been successfully controlled but will obviously continue to be an area of focus given recent circumstances.
Net debt was GBP 0.4 billion lower than the same time last year, mostly due to operating cash flow and the net proceeds from the PRH disposal. We continue to have a strong balance sheet and significant liquidity, which we enhanced with the very successful launch of our GBP 350 million education bond in May. Today, I am exactly three months into my role as CFO of Pearson. Now feels like a good time to share some of my initial thoughts and key areas of focus. Firstly, as we transition further to a digital model, we need to hone our key KPIs, particularly lead indicators. We have shared today some KPIs, such as applications for the first time, and will look to enhance and refine these over time.
Secondly, we will focus on improving divisional profitability, in particular in North American Courseware and OPM, which is where the biggest opportunities lie as these business models transition. Alongside this, I will ensure that we remain cost-conscious and competitive, particularly in our enabling functions. Finally, I'm also focused on our return on investment metrics. My ambition is to report externally what we track internally in time. With that, I will hand over.
Thanks, Sally. A couple of key themes emerged from what Sally just took you through. Two of our biggest growth opportunities, professional certification and English assessment and services, were, as you heard, temporarily diminished by the global lockdown. As the lockdown eases, they are now recovering, and they will continue to grow into the future. At the same time, our other big growth opportunities, virtual schools and online universities, services that enable blended or hybrid learning, online proctoring and digital assessment, pathways to employment, pearson.com as a learner-centric gateway just got bigger and more immediate. That's because COVID-19 is accelerating three big trends that are at the heart of our strategy. Learners are taking more direct control of their own learning. The growth of hybrid education models, which combine the best of face-to-face and online learning.
The urgent need for people to continuously reskill and upskill to succeed and make progress in the changing way, more world of work. The Pearson Learning Platform is a key enabler of this digital transformation. It brings to market consumer-grade products and great user experience that drive clear learning outcomes. In February, we identified a specific roadmap of missions that accelerate our ambition in higher education as well as lifelong learning and employability. You can see them on the slide here. In the fall, we launch, as planned, a direct-to-learner storefront offering on pearson.com that will enable learners to easily find, subscribe to, and access their digital text directly from us. That actually went live yesterday. We are launching feature improvements and additional titles to our Revel product that will enable educators to organize their classes and get insights about student progress with an improved learning experience.
We're also launching the new Pearson eText, a platform-based product with enhanced features and functionality, taking the traditional e-book to a new level. We're making good progress on our current roadmap, and we're working on new missions specifically targeted at skill development and employability, and at transforming our OPM business from a white label managed services provider to an online learning pathways business. The Pearson Learning Platform, you remember we talked in February, drives digital growth in four ways. Share gains with differentiated experiences that improve learning outcomes. Expanding the platform segment with innovative new products. Establishing direct relationships with an evergreen supply of learners who we engage with over a lifetime of learning. Recapturing share from the secondary market. Let me expand briefly on this last point.
The biggest immediate opportunity for us in U.S. higher education courseware is recapturing share from our biggest competitor, which is the sale or rental of our own products in the secondary market. Last year, adoption of Pearson courses by faculty generated demand for learners to consume around 33 million units of Pearson product. We only got paid for 12 million of those units, with the rest of the demand being filled primarily by the secondary market, with some, as you can see, non-consumption. As we scale our digital and access models, providing better value to learners by focusing on outcomes, affordability, and the experience, we will recapture a growing share of this lost value. We can see that this strategy is already gaining traction. Digital volumes are up 5% with a 26% increase in e-book rentals, which is an early indication of secondary recapture.
As you can see on this slide, Inclusive Access revenues are up 28% year to date. As importantly, more new institutions are signing up all the time, which will help us in the years ahead. The first year of our digital-first product strategy, with frequent releases of content, features, and updates no longer tied to an edition cycle, with print only available through our own rental program, is working. In the first half of this year, we increased total unit sales whilst shipping 700,000 fewer print products into the channel, diminishing future secondary supply. This print to digital shift will continue to hurt revenues in the second half of this year as we unbundle premium price print and digital products for digital only, and as campus bookstores carry less and less physical inventory.
The quicker we complete this transition to an overwhelmingly digital and subscription-based business, the sooner our higher ed courseware revenues will first stabilize and then start to grow again as we take back the share of those 14 million units per year that we currently lose to the secondary market. That is a very big and interesting opportunity for Pearson that will play out over the next few years. That's just one example for all the short-term challenges of the longer-term value we are creating by focusing everything on ensuring that Pearson emerges as the winner in digital learning. To recap, as anticipated back in April, we have seen significant disruption as a result of COVID-19, but we are encouraged by the improving trends and pickup of sales in June.
Uncertainty remains, we've taken swift action with all major parts of the company moving quickly to respond to the pandemic. This is enabling our business to recover as lockdown measures ease. Longer term, the pandemic is accelerating a key trend. The future of learning will be digital, and learners will care most about three things: experience, outcomes, and affordability. Those are the three things that drive everything that Pearson, the world's digital learning company, does each day. To repeat what I said earlier, the speed, grit, ingenuity, and purpose with which thousands of Pearson colleagues around the world are stepping up through the pandemic will ensure that all parts of the company are well placed to emerge from it in a stronger competitive position and with more opportunities to grow in a sustainable and profitable way.
With that, we will be very happy to take your questions. I mentioned that we've got colleagues joining us for the Q&A. They are all in different locations around the world, so we'll be as slick as we can be in handling the questions, but I hope you'll bear with us if there's an odd delay as we patch different colleagues in. Hugh, over to you to take questions from our colleagues.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and then two on your phone keypad now in order to enter the queue. After I announce you, just ask that question. If you find that question has been answered before, just say, "This question has been answered already." Once again, if you have a question and you haven't already, please press star and then two, and there'll be a brief pause while the question's being registered. Our first question is over the line of Katherine Tait at Goldman Sachs. Please go ahead. Your line is now open.
Morning, everyone. Thank you for taking the questions. My first question is on the growth in Inclusive Access, the sort of additional 94 institutions that you signed over the course of the first half. Can you give us a sense of how much these institutions were using Pearson materials before? Sort of how you think about the shape of the revenue through, do we see a negative mix impact from the lower pricing? How does that translate ultimately into higher revenue? If you could just give us a bit of a sense of the moving parts for those specifically, that would be helpful. Secondly, on the online proctoring, can you help us understand the cost structure of online proctoring? How does it differ to, I guess, the sort of physical test centers in your business, and how could we think about the evolution of that going forward?
Finally, Sally, you talked about focus on ROI. Can you talk about how you think about this with relation to organic investment versus acquisitions like Smart Sparrow? What are the sort of key considerations there? Thanks very much.
Thanks, Katherine, and good morning to you as well. Let's go to Tim first. Tim, do you want to pick up on the sort of Inclusive Access? 94 institutions, new institutions, what was their mix and use of Pearson products, and how do we think about the impact on revenue over time?
Sure. Thanks for the question, Katherine. We're very encouraged by the IA results here to date, as well as our pipeline. In terms of the product mix between current customers and new, it's a combination. John mentioned that we had a strong competitive adoption performance this spring, so some of the uptake in Inclusive Access volume is a result of new customers as well as conversion of current customers. From a product mix standpoint, we're also happy with an increasing proportion of the product mix in e-books as well as our platform products, because the more that e-books are fulfilled through the Inclusive Access channel, not only do we have the customer benefits, but it's a big driver of secondary recapture.
Okay. Thanks, Tim. Bob, do you want to pick up on, obviously, significant growth in online proctoring, still in its relatively early stages, but how does the cost structure compare to our physical test centers, and how are we thinking about scaling it over time?
Thanks, John. I appreciate the question. Online proctoring hit us really hard and fast, and we were able to adapt quickly. The cost structure early on is very similar to brick and mortar because you do have the remote proctors. You still have the human headcount cost, but you obviously don't have the rent and facilities cost. We have a major investment going on to get our costs down, have more automation in that area to keep the cost down. The take-up for online proctoring has surprised us. We're very happy with the success we've had, and we are going to continue to be the best in class in that emerging area.
Thanks, Bob. Sally, how are we thinking about return on investment between sort of organic and inorganic spend?
One of the things I've been looking at in the early months is the return on investment, particularly looking across each of our businesses and divisions to make sure that we have clear metrics in place. We're focused on the return on the cash investment that we're making. Whether it's an OPM business where the investment tends to be more from a P&L perspective, or whether it's one of our more traditional businesses where you capitalize that investment, making sure that we're balancing both risk and reward. Obviously, over recent times, that's an organic focus that we've had. You're quite right. We've had some small investments, more recently, Smart Sparrow, that enhances that organic investment that we're making internally with things like the Pearson Learning Platform, and as well as the Lumerit business we have.
Basically, a return on cash flow, which is equal whether we're looking at something from an external acquisition point of view or whether it's from an internal organic point of view.
Okay. Thanks, Katherine. Hugh, where are we going to go next?
Okay, the next question is over the line of Matthew Walker at Credit Suisse. Please go ahead, Matthew. Your line is now open.
Thank you, and good morning. First of all, obviously, it's nice to hear that you're recapturing some share. I think you said you've recaptured most of the points of share that you lost. Can you just go into more detail about how you've done that and what incentives you may have given in order to do that? We noticed on the Cengage call, they said people have been less focused on Unlimited because of the pandemic. The second question is really, I don't know if Sidney's on the line, it's really about the new CEO. The question is really, how much freedom is the new CEO going to be given on digital pricing? If they decide that they want to rebase digital pricing, are they going to be allowed to do that?
Is the board going to basically appoint someone who agrees with them and doesn't want to rebase digital pricing? Thanks.
Okay. On the first question, Tim, do you want to pick up? I think as I signaled, Matthew, I think the adoption season paused in March, late March, early April, because of the pandemic. It picked up again with vigor. I think we are very pleased with the way we've performed competitively. Tim has done a great job of leading that. Tim, do you want to talk a little bit more about the work we've been doing?
Sure. Thanks, Matthew. To pick that up, the incentives for the adoption recapture were largely around the quality of the relationships that our sales force has with customers, as well as product market fit. They got off, as John mentioned too, a strong start in January. They supported customers significantly in the sudden shift to digital and online learning. They resumed their sales activity more quickly than we had anticipated and extended into the summer as John indicated, all of which added up to the strong competitive performance we mentioned. It's also a sales force that entered, particularly the spring, stable from a relationship standpoint. We were through the changes we had made and making greater utilization of our one CRM tool, which provides the kind of visibility and confidence about our adoption performance.
Okay. Thanks, Tim. On your second question, Matthew, obviously this is our interims call. As you would expect, you have the CEO, the CFO, and all of the senior management team. You'll have seen in the press release this morning that Sidney's reported that the CEO succession is in an advanced stage. That's obviously a matter for the chairman and the nominations committee. That's not a matter for me. My job, and the job of everybody on this call, is to ensure that we do the best possible job we can of meeting the needs of educators and learners through the pandemic. We are rising to the challenge. I'm confident we're going to emerge from it as a stronger, better business. My job is to transition to the new CEO with as much wind in our sails as we possibly can, and that's what we're doing.
I would expect that the CEO will pursue the strategy that he or she thinks is right for the future of the company. My job is to make sure that they're in the best possible position to do that.
Okay. Thanks, John.
Okay, we now go to the line of Adam Berlin at UBS. Please go ahead, Adam. Your line is now open.
Hi. Good morning, everyone, and thanks for taking the questions. The first thing I just wanted to get clarity on was, compared to the original EBIT bridge that you gave at the full-year results and now updated for the first half, how should we think about the second half? Is there anything that's changed in terms of any of the specific drivers that may have changed since you gave the guidance in February? Specifically on the trading, are we still thinking there's a GBP 20 million impact as you first described? Then what are the other COVID-19 impacts we could see? If you could help us think through the size of those based on your best available.
I know you just mentioned there's a bit more to come on student assessment, but where else could we see negative trading in the second half to get to what your guidance is today? Would you still think consensus numbers are achievable? Just to understand your thinking there. Specifically on that, when you talk about Global Assessment improving in the second half, are you saying that you expect Global Assessment, particularly Pearson VUE, to grow year-on-year in the second half or just decline by less in the second half? The third kind of point is, within online learning, you said there was about GBP 50 million of investment in the first half. Is there going to be more investment in the second half as well in online learning?
It's kind of all on the same theme, but just if you can answer those two supplementary questions specifically, that'd be very helpful.
Sally, could you sort of pick up on the bridge and how we're thinking about the second half of the year? Bob, maybe you could then just give a little bit of color about how we're adjusting to use the phrase of the day, the new normal, in how we're running our Global Assessment businesses. Sally, maybe you could pick up on the bridge, and then Bob, you could just talk a little bit more operationally about how we're adjusting to the world.
Yeah. First of all, picking up on the bridge in the first half, you'll see that putting the COVID impact of GBP 140 million to one side, all the other elements are pretty much what we would all have expected. Turning to H2, the key elements are picking apart assessments, first of all. You've got VUE recovery in the second half of the year. I think you can expect to see VUE exiting the year back on the trajectory that we would all have expected at the beginning of the year into 2021. For school assessments and clinical, which are more tied to schools which are going back more slowly, a moderate impact as you'd picked up compared to H2. For our international businesses, we expect to see recovery in a similar manner to that that I described for VUE. Our online business.
We've shared with you the applications data for our virtual schools business, and that's 60% increase in the first part of the year. That should turn into enrollments in Q3, which will drive revenues in the second half of the year and then also into 2021. For North American Courseware, we expect the similar trends that we had flagged at the beginning of the year. A decline in print, unbundling offset by digital growth with an impact from enrollments given the current circumstances. From an online investment point of view, the nature of these businesses means that that investment tends to be in the first half of the year, so you see more of an impact in the first half.
Okay. Thanks, Sally. Bob, do you just want to give a bit of color to sort of, as we've got our network going again around the world, sort of how things are operating, how we're adjusting to the new world?
Sure. Thanks for the question. We are open in most places now. We have limited capacity for social distancing, but we are compensating that by staying open longer hours. Most of our testing centers in the U.S. are open from 6:00 A.M. till midnight, in the U.K. from 8:00 A.M. till about 8:00 P.M. We are back on track. We are excited that the online proctoring has taken a good bit of volume out of the PPCs, our Pearson Professional Centers, which reduces some of the stress on those. We think that we will emerge, in the third or fourth quarter, with the trajectory of getting back to the growth that we expected at the beginning of the year.
Okay. Thanks, Bob, and thanks, Adam. Hugh, back to you.
Thank you. We now go to the line of Tom Singlehurst at Citi. Please go ahead. Your line is now open.
Hi, it's Tom here, from Citigroup. Thanks for taking the questions. First one actually on U.S. higher education courseware. I've noticed there are some complaints from libraries that you, Cengage and McGraw Hill, are not making physical versions of your books available for them to loan out to students, which is obviously an encouraging sign that you're focused on sort of clamping down on the secondary market. I just wondered, one, whether you'll be able to hold the line on that, whether there's any sort of prisoner's dilemma type impact that we should worry about. Secondly, whether there's any sort of extraordinary provisions the libraries could pull to try and sort of argue that they're justified in breaching copyright and lending them out under extraordinary measures anyway. That was the first question. Then the second one on virtual schools. Obviously, applications are up, which is great.
You talk a bit more about more schools coming online. I'm just wondering whether you could sort of contextualize that three new schools in the fall, what increase in total available spaces does that give you? Just more broadly, as we run into next year, I mean, is this a process that you can accelerate, or is it just a sort of slow burn in terms of expanding available places? Thank you very much.
Okay. Thanks, Tom. We'll come to Rod in a minute to talk about how we're building capacity in our virtual schools. But first of all, Tim, do you want to pick up on the question around rental or loaning our e-books through libraries and pick up on that point?
Sure. Libraries play an important role in the educational access system primarily for research purposes. Specifically in terms of product availability from a print perspective, as a reminder, while our print products in our rental program are available in print only, it's a print-to-own model where at the end of the rental period, the consumer can decide if they want to retain ownership. From a library perspective, I'm sure we can evolve a policy that could enable libraries to participate in print availability. Again, primarily, students access their content in a number of different models in addition to libraries.
Yes. Just to add on that, Tom, I think the fact that we've seen a 25% increase in volume of e-book rentals in the first half of the year basically says to you that we've put together a compelling model. It's priced very competitively against the secondary market. I think we are providing very good value to students in the e-book market, and I think we expect that growth to continue in the second half. Rod, do you want to pick up on the virtual schools point? I know in addition to opening new schools, we're also working hard and have been for some months now to expand capacity in our existing schools so we can meet as much of the huge increase in demand that we're seeing as we possibly can. Do you want to say a little more about that?
Yeah. Thanks, John, and thanks, Tom, for the question. Absolutely, we are seeing one of the biggest constraints to growth in the virtual school sector until now has less been about capacity and more about category awareness. One of the things that the COVID-19 crisis has done is, of course, significantly increased the awareness of virtual schooling as an available option, which is driving very strong and accelerating demand. In terms of the capacity itself, there are currently 32 states in the U.S. where it is possible to operate virtual schools. We in Pearson are already in 29 of them, and we are reasonably confident in the next year or so of getting into at least another two of them.
As far as capacity is concerned within each of the schools, we're actually feeling pretty good about our capacity right now to take the level of growth that we're seeing, very significant growth. We are confident today in the capacity that we've got. Yes, feeling good on the capacity front.
It probably just worth saying, we are not expecting the 60% increase in applications, I don't think you should assume is going to translate into a 60% growth in enrollments, but I think you should expect it to translate into very significant growth in enrollments and much higher than we would have seen in recent years. Okay. Hugh, where should we go next?
Okay, we now go to the line of Sami Kassab at Exane BNP Paribas. Please go ahead, Sami, your line is now open.
Thank you very much, Hugh, and good morning, everyone. I have three questions, please. The first one is just to follow on what Tom asked. How many of your Connections Academy have enrollment caps? How far are you from reaching these enrollment caps, please? Secondly, how do you assess the impact of the regulatory changes on developmental education? Are you through with the headwind there, or do you think that changes in developmental math and reading will remain a drag into H2 next year? Lastly, historically, your higher ed courseware revenue forecast implied 1% to 2% decline in enrollment. Is that still your view for fall 2020? Thank you.
Okay. Thanks, Sami. Rod, do you want to pick up on the first point, what enrollment caps exist and what sort of headroom does that give us in terms of meeting increased demand for virtual schools? I'll come on to Tim for the next two questions.
Yeah. About half, about 21 of the Connections Academy have got enrollment caps. Even within those, we're very confident about the caps that are in place give us capacity to grow, with the exception of a small number which we are currently in conversation with. They're a small number that have caps that could limit growth. For the most part, we feel that we're in a good place.
Okay. Thanks, Rod. Then Tim, do you want to pick up on Sami's other points? Is there still more room to go in terms of the impact of regulatory changes in developmental education? Are we there now, and we were working on the basis of a 1%-2% decline in college enrollments at the start of the year? What's our best sense of now where it's likely to end up and why?
Sure. Thanks, Sami. We think we're considerably through the impact on developmental education, not completely. As a reminder, developmental education demand is driven by the number of students who need it and how it's served. How it's served has continued to integrate developmental education and other college courses, it eliminated, in some states, dedicated courses. Majority through, not entirely through that, Sami. On the enrollment outlook, as John said, we started the year with an outlook of low single-digit enrollment declines consistent with recent years. We now have a view of high single-digit declines. Let me step back first, acknowledge no one knows. We have a working hypothesis on this. We think it'll be high single-digit because we'll see some pressures from expected lower first-year starts. Some students will choose to defer.
We expect lower international enrollments for policy reasons, as a reminder, international enrollments are 5% of the total U.S. student enrollment and 2.5% of undergraduate. We think that's factored into the high single digits. We also expect some redistribution. Some students will choose to stay closer to home, we may see a possible increase in adult learners seeking upskilling or reskilling. How they acquire those skills may change, may involve more short courses. Those areas we're also investing in and offering through our Global Online Learning and U.S. Higher Ed business.
Okay. Thanks, Tim. I think the other point, I think Tim talked about earlier, Sami, is whatever level enrollments end up being, we are certainly going to see an accelerated shift from analog to digital within it, partly as a direct result of the actions that we're taking. I think also with the accelerated shift to hybrid learning, we're seeing greater and deeper use of our digital products, both in terms of platform-based products and e-books as well. Okay. Thanks, Tim. Thanks, Sami. Hugh, where are we going next?
Okay, we now go to Patrick Wellington at Morgan Stanley. Please go ahead.
Yeah, good morning, everybody. Two questions. First one to Sally. You talked about the enabling costs and how they are pitched at pretty optimum levels in most areas. Can you give us a likely absolute number run rate for that level of cost? Because you've clearly pitched it at the optimum rate. Secondly, just going back to Virtual Schools, can you give us an idea or talk a little bit about operational gearing in this business? If we get a substantial increase in enrollment, obviously you have the capacity, as you're saying, in place. What's the drop-through like of incremental revenue to the bottom line in the Virtual Schools business?
Okay. Thanks, Patrick. I think Sally will pick up both of those, and I'm sure she'll make the point on enabling costs. We'd never say we're optimum because there's always learning, always improving, always scope to do better. Sally, do you want to pick up both on enabling costs and what the sort of gearing and sort of margin characteristics of our Pearson Virtual Schools businesses are?
Sure. On enabling functions costs, we've had a period of reorganization that's got us to a really good place in these costs, and we do benchmark well. I want to remain cost competitive and the benchmarks will move on, and so will we. We will make sure that all of the systems that we've put in, all of the processes we've put in, continue to keep those costs on a downward trajectory, and also that we make the most out of those investments. Things like the CRM system that we've put in, that's not just about making our sales teams benchmark well from a cost perspective, it's also about driving revenues with the data that we see, as well. I'm very focused on cost competitiveness and enabling functions.
In terms of Virtual Schools, that business, from a profitability perspective, it has decent profitability already compared to the rest of the group, and the operational gearing of that group would be in line with most online businesses. You're looking at a sort of 40% type margin.
Okay.
Well, hang on a second. I didn't actually get an answer to either of those questions. Can you talk about the enabling functions as an absolute number? Either you have reached an optimum level in terms of the absolute cost, because a lot of the things you talk about don't have a relationship with sales, the ERP platform, the corporate functions. Do you look at those enabling costs in proportion to the sales of the group, or is that an absolute number, which last year was GBP 449 million, which you can make marginal adjustments to? You've got your GBP 50 million next year. I'm just trying to see what drives those costs, because it doesn't seem to me that they move around with the level of sales. You did talk about having already largely optimized the level of costs.
On your 40% margin in Virtual Schools, is that a 40% total margin, or is that 40% drop-through of incremental revenue? Actually that drop-through should surely be much higher. You've got basically a fixed cost in Virtual Schools, and you're getting more student revenue across it. What does that 40% mean?
On the enabling functions costs, you're right, GBP 450 million last year, which is about 11.6%. I'm wanting to drive that percentage down. The GBP 50 million will help with that next year, but that's not the end of it. I want to continue to drive it down. In terms of variable to sales, you're right, the type of costs that are in there aren't variable to sales. There's an element of discretionary costs that I can continue to drive down, and make the most of, but I wouldn't call them cost to sales type costs. In terms of the schools margin, the profile is not simple. If you've got an early day school, you're recruiting teachers, you've got to maximize class sizes.
That 40% that I'm giving you is kind of a broad brush over a period of time, with then a relatively small level of central costs given the type of business it's in.
Just to build on that last point, Patrick, if you're thinking of virtual schools, there's really the costs come in three buckets. You've got your sort of enrollment marketing, so the cost of actually sort of generating leads and converting those leads into enrollments. Clearly at a time like this, your cost of acquisition goes down because you've got a lot more level of interest. Secondly, you've got your technology platform costs, which we are sort of investing in, which obviously do have leverage and scale, the more you go through them. To Sally's point, this is virtual schooling, so this is still schooling that involves teachers, but teaching virtually rather than face-to-face. By definition, if you've got more students, you need more teachers. It's a bit of a hybrid model rather than thinking of it as a pure sort of online platform play. Okay.
Thank you, Patrick.
Thank you.
Where should we go next?
Okay. Well, before going to Nick Dempsey at Barclays, if anyone has any further questions at this stage, please do press star and then two on your phone keypad now. Nick, over to you.
Good morning, guys. I've got, just to pick up on the point of adults perhaps choosing short courses for upskilling rather than perhaps a two-year community college. To what extent do those shorter courses typically use textbooks or do the companies offering them create their own content, some kind of notes that goes alongside it? Second question. You're talking about operating profit being broadly consistent with the GBP 330-odd million of Vuma consensus. To what extent either side of that should we be thinking, and what are the major variables? Is that GBP 330 going to link to your high single-digit assumption on enrollment? How do we define broadly consistent? Last question. As you work to take share back from the secondary market, how do you expect the secondary market to fight back?
There's a hell of a lot of print textbooks out there in the secondary market. Won't the rental players just start to lower their prices to make sure that they're clearly the cheapest option out there? Otherwise, they're stuck with a lot of books. Won't students just opt for the cheapest option again?
Okay. Thanks, Nick. I'll maybe pick up on the third point in a minute. Rod, do you want to pick up on the first point? Clearly the shift to sort of short courses and offering it as part of a sort of a broader blended offering is important, and I know that you and Tim have been working very closely together, as I mentioned in the opening remarks, in terms of sort of bundling. I know we've also got some interesting initiatives where we're actually combining our courseware with our services with some of our biggest enterprise partners. Do you want to talk a little bit about that? Sally, do you want to talk a little more about some of the underlying assumptions between how we're expecting things to turn out in the second half of the year?
Rod, do you want to pick up on the short courses point?
Absolutely. Yes, John, thanks for the question, Nick. Actually, as John was saying earlier, as learners take more control of their own learning, we are seeing a clearer and growing demand for shorter courses connected to employment. This, of course, has been accelerated by what's happened with COVID-19. In fact, in the U.K., in response to a government request, we created something called UK Learns, which is populated with about 500 or so accredited short courses that we made available to the millions of furloughed workers. UK Learns is really the precursor to something we've been working on now for a while, Pearson Pathways, which contains a sophisticated engine which matches consumer need to the right pathway and ultimately to the right course.
That actually is going to help us not just drive growth, but it will also help drive efficiency in the enrollment processes that we have within our core OPM business. Indeed, we're inviting our OPM partners to participate in the platform. To your question about the degree to which content that we may have produced is relevant to those courses, it certainly is. There are a number of things we're doing. In fact, Tim might pick up a little bit on some of the IT professional courses that we're producing. We're producing shorter BTEC courses of our own. In fact, we have, based on our own courseware, a range of courses that give students credit for part of their degree program that are based on Pearson textbooks. These also are short courses that we're making available to students.
There is a synergy between the two, but this is a growing opportunity.
Okay. Thanks, Rod. Sally, do you want to pick up on the point around what are our broad assumptions for the second half of the year, acknowledging the high degree of uncertainty that there is?
Yeah, sure. Our current assessment, as I said, is that we'll be broadly in line with those market expectations, which you pointed out are on Vuma. In terms of a range around that, obviously, we give a range around guidance and did so at the beginning of the year. That would be a decent range to use, maybe given the uncertain circumstances, a little wider than that. To your question about the enrollments and whether those are in line with that, then, yeah, that's one of the assumptions that we've used in giving that feedback.
Okay. On your third point around the secondary market, I'll ask Tim just in a minute just to talk a little bit more about some of the new features and functionality that we're bringing to bear with the next generation of eText and how that will further enhance the eText offering. Just to sort of pick up on your point, Nick, first of all, if you think even three years ago, we still had something like 7 million print units going into the secondary market. It's now dramatically lower than that. Over time, we are starving the secondary unit. Whilst you're right to say that there's a lot of secondary units out there, each year they get older, and they get less out of date, and we are starving it of new, up-to-date products. That is having an impact.
Secondly, for the first time last year, the student survey showed that given a choice, a majority of students, if the price was right, preferred an eText to a print rental offer. The consumer demand is going our way, and then we're playing a very active role in shaping the dynamic of the market. Third, Tim, we're actually making the eText a very different and much more attractive proposition. I don't know if you want to talk a little bit more about that.
Sure, John. Nick, thanks for the question. We agree the consumer choices are based on utility and price. As John mentioned, we're seeing this. Students demonstrate digital preferences or sort of a rise of a secular digital preference we're seeing. On the utility side, as we shift more of our product not only to digital but through our Pearson eText, we're able to add features that students value. Be that search, omni-channel, offline, online, integrated study tools within them, and regular updates to content and functionality. We think those consumer preferences and our ability to meet them rapidly through the Pearson Learning Platform put us in a strong position for secondary recapture.
Thanks.
Can I just quickly get back to the Oh, sorry. Go ahead.
Well, I was just going to say, Nick, just another example. Audio. This generation of students love being able to listen while they're commuting or traveling or working out at the gym or in the coffee shop or whatever. You can't listen to a physical textbook. You can listen to eText. That's just another example of how, as we increase features and functionality, we make our offerings much more attractive compared to secondary. Sorry, Nick, I interrupted you.
Yeah. No. Just to go back to the first question. I heard some interesting stuff you're doing with short courses. I guess my question was really, if there's a mixed shift away from two-year community colleges or adult learners coming back if they're out of a job, to short courses, is that a negative effect on your ability to sell content because those short courses don't use your content? Whereas back in the day, back in the last recession, two-year community colleges absolutely did.
Yeah. I think, Tim, you may want to pick up on this, but I think a lot of the short courses provision we're seeing has been offered by four-year public universities. It's been offered by the for-profit sector. Short courses have been offered by sort of community colleges. I don't think you should assume that just because there's a shift to short courses, we're not seeing some of our established partners and providers meet that demand. Tim, do you want to add to that?
Sure. Thanks, Nick. Community colleges in the U.S. serve two purposes. One is that the first two years of a general education for students who want to transfer. The second is really, they've always been in the provided the role of employment-based, job-driven education. Short courses, to some extent, are just an alternative form of that and increasingly a digital form of that. To Rod's point, as more teaching turns to online and digital, they still have content. The trends of integrated content, and drawing on digital courseware content as part of short courses is part of what exists now and we believe will continue.
Okay.
Great, thanks.
Thanks, Nick. Hugh, back to you.
Well, I'm afraid we've only got time for one more question. The final question for today is over the line of Sarah Simon at Berenberg. Please go ahead.
Yes. Hi. I've just got a couple of small questions. Firstly, can you give us an idea of how much discretionary saving you managed to get out in the first half to offset some of the COVID impact? Secondly, can you give us an idea within higher education courseware what the split is in the first half between analog and digital? Within digital, what is Inclusive Access, and what is e-books? Thanks.
Okay. Sally, do you want to pick up on the discretionary savings point, and then maybe between you and Tim, you can help answer. They'll give a bit of a color and a bit of flavor around the sort of digital analog mix.
Yeah. For discretionary savings, once COVID locked us down, we have about GBP 10 million worth of savings each month coming through. Also, there's obviously an impact in terms of performance bonuses in the first half as well.
Okay. Tim, how's the sort of digital analog mix shaping up, and how's that been sort of influenced by the growth in Inclusive Access? Tim, are you there?
Sorry, I was on mute. Thanks, Sarah. In terms of the analog digital mix, as John and Sally have mentioned, we're seeing both digital volumes and digital revenue increases, and we're seeing accelerated print declines. The first half of the year is circa 40% of the full year. We expect those trends to continue into the second half. It's too early to tell how that might completely turn out. In terms of how IA factors into that, as we mentioned, we're seeing a 28% increase year to date. We're seeing a strong pipeline for fall. To the question that Katherine posed earlier, we're seeing the product mix within that support an increasing portion of e-books as well as platform products in both retained and new customers.
While we don't know how the second year will turn out, we do expect growth in digital and growth in direct channels, all of which set us up for a long-term, more digital and more sustainable business poised for both the kind of secondary growth that John's described, as well as the adoption share growth fueled by the Pearson Learning Platform.
Okay. Thanks, Tim.
Can you give us-
Thanks. Sorry, Sarah, go on.
Yeah, I was just going to say, can you give us any idea of what proportion of total courseware revenue in H1 was from Inclusive Access? Not the growth, just the percent in total.
Tim, can you help with that?
I'd have to do a quick lookup, so that may be something we have to get back on.
Maybe we'll Sarah, we'll follow up offline because, I mean, clearly remember that there's a sort of obviously a weighting to the second half, but we'll pick up and follow up on that offline.
Yeah.
Okay.
Thanks.
Thanks, Sarah. Thanks, Tim. Thanks everybody for joining us this morning. I don't know what your experience of the lockdown has been, but the fact that we went 65 minutes before somebody said, "Sorry, I was on mute," I think it was pretty good going. Thanks as ever for your interest in the company. Jo, Anjali, and Teddy are all with us here, and if you have any follow-up questions that you want to ask, please let us know. As I say, thanks for your interest and look forward to catching up again soon. Cheers now. Bye.
This now concludes today's call. Thank you all very much for attending. You can now disconnect.