Welcome to the Pearson Q1 Trading Update Analyst Call. Today, I'm pleased to present John Fallon, CEO and Feli Johnson, Deputy CFO. Please begin the meeting.
Good morning, everyone. You just heard John Fallon here. Thanks for joining us this morning, and I hope you're keeping safe and well. I am joined at a safe distance, of course, by Sally Johnson who will formally succeed Coram Williams as our new chief financial officer after today's AGM. I'd like to take this last opportunity to thank Coram for all that she's contributed to Pearson in various guises over the last eighteen years and to welcome Sally to her new role as she steps up from Deputy CFO.
I know she's going to make, indeed, is already making as we work our way through these extraordinary times a great CFO. This is our regular q one trading update. So let me start with the headlines, which Sally will walk you through in detail shortly. As a direct result of COVID-nineteen, our sales through the March, which would otherwise have been broadly flat, are down 5%. We are performing in line with the framework we set out on March 23, and we are reducing costs in the businesses most affected to help offset some of the impact.
And so whilst this may be our regular Q1 trading update, these are of course quite irregular times. And we are, as you would expect, doing all we can to safeguard the health and well-being of our employees, learners, and customers. As we deal with the pandemic, Pearson is in a strong financial position with a healthy balance sheet, low net debt, and good liquidity. Our financial strength means that the board is recommending the payment to shareholders of the final dividend in 02/2019. And our financial strength also enables us to deploy all our people and resources to support our communities as the world's learning moves online at an unprecedented speed and scale.
We are redeploying, not furloughing colleagues who can't currently do their regular job to where we see the biggest customer needs and opportunities. And I'm very impressed with the speed, spirit with which Pearson's colleagues working with our customers and partners have rallied the course to share just a few of many examples. Obviously, this all started back in in January in China and then moved on to Italy and across those two countries. We now have over 1,200,000 teachers or students who've been using our online platforms containing thousands of interactive lessons. Since then, we provided forty five thousand hours of online tutoring to American college students, enabled a 100,000 school students to access virtual schooling.
We've seen 350 parents in The UK turning to the mass factor to help them with their kids' math schoolwork. And in the last in the first two weeks since its launch, our global online learning hub has already been used by over 500,000 times and that's scaling by the day. And we have seen a surge in March in applications for our Connections Academy, our virtual schools network compared to 2,019. I could give many other examples, but just to quantify, we have now provided somewhere in in excess of £25,000,000 worth of courseware and services free to support our customers and our communities as they respond to this unprecedented challenge. But we're also moving quickly to scale up new platforms and products.
For example, there are millions of people here in The UK and worldwide that have been impacted by the pandemic with potentially huge implications for the jobs market. That's why today we are announcing plans to launch UK learns, a portal with a richly curated portfolio, employment enhancing short courses, personalized to meet the needs of the furloughed and the unemployed. When the threat of the pandemic eventually eases, it will be even clearer that the future of learning increasingly digital. So as well as as I've described, scrambling quickly to support our customers and communities through the crisis, we're also continue to invest for the longer term in the platform, the products, the services that will help make the next generation of digital learning a reality. We're making good progress against exciting roadmap of new digital products and services that that we shared with you in February.
And also looking beyond the pandemic, we do see further opportunities to make Pearson a simpler, more efficient company bringing further significant cost savings next year. Sally will talk you through that in more detail as well as giving you a more thorough update of our Q1 trading. And then we'll both be happy to answer your questions. So Sally, over to you.
Thank you, John. As John framework we set out in our COVID-nineteen update on the March 23. Underlying revenue is down 5% in the quarter with good growth in Global Online Learning offset expected declines in our other segments. Covering each segment briefly. Firstly, Global Online Learning revenue grew 6% driven by good growth in enrollments in our virtual schools.
Online blended learning likely to be the most material short term commercial beneficiary of the increased interest in online learning with a surge in applications in March compared to 2019 as many explore full time digital learning for the first time. In Online Programme Management, revenue grew slightly. As I said, it's our full year results. We have deliberately slowed the rate of growth in OPM in order to transition to a new operating model. Global Assessment revenue declined 3% due to the closure of testing centers since mid March in our Professional Certification business, along with a decline in Clinical Assessment given school closures, offset by growth in student assessments.
We estimate that the financial impact of professional test center closures will be to reduce operating profit on average by approximately GBP 20,000,000 for each month the centers remain closed. We expect to open test centers in a phased approach and as tests run throughout the year, this provides time for pent up demand to be partially realized in the last part of the year, although any ongoing social distancing will also impact it. In student assessment, revenue was slightly favorable. However, a number of states and boards have waged testing for this year, which will impact our 2020 operating profit by around GBP 20,000,000 after mitigating actions. We continue to believe there could be further state test cancellations, which would further impact on operating profit modestly.
In international, revenue declined 10% as a result of school and test center closures impacting courseware sales and the Pearson Test of English. There was also a phasing impact on courseware sales in The UK. We expect to see a modest impact on profit due to the cancellation of GCSE A level and BTEC testing following the announcement made by the UK government. The full year impact on international courseware is uncertain, especially given that the period for which education institutions may be closed is unclear and our sales periods are seasonal. We expect some impact from physical site closures in our higher education institution in South Africa and our franchise and systemic businesses in Brazil.
North American courseware declined 10% due to the expected continuation of trends seen in U. S. Higher Education in 2019 as well
as a decline in courseware in Canada as a result of school closures. U. S.
Higher Education was down slightly less than 10%. Print revenue declined as expected, returns are in line with expectations and there is a small impact from the closure of campus based bookstore as a result of COVID-nineteen, which we expect to continue into the second quarter due to the escalation of the pandemic. Q1 continues to be a small quarter and this year has seen less benefit from physical sales in Q4 shifting to digital sales in Q1 given the extensive decline of print in 2019. To partially mitigate the impact of COVID-nineteen on operating profit, we have identified actions to reduce discretionary spend this year, whilst ensuring that Pearson is still well placed to benefit as the macroeconomic landscape recovers. On a longer term basis, the progress we have made on our simplification and digital transformation has enabled us to identify further £50,000,000 of cost savings, which will benefit profit from 2021 onwards.
We have financial position with low net debt and strong liquidity. At the March, we had GBP 800,000,000 immediately available liquidity. After quarter end, we received GBP $530,000,000 as we completed the sale of our remaining stake in Penguin Random House. And we have recently secured material new lines of credit to enhance our existing revolving credit facility. The Board also took the decision to pause the share buyback that we initiated earlier this year as a prudent measure given the current pandemic.
These actions alongside a short term moderate negative impact to the business enables us to navigate both the COVID-nineteen pandemic and to continue to drive our digital transformation. And with that, I'll hand back to John.
Thanks, Sally. Just before we take your questions, a quick reminder like many of the listed companies and for reasons you well understand, we have changed the format of our Annual General Meeting today, and we're proceeding with the minimum necessary quorum of shareholders in order to pass the resolutions. And in addition to Sally being appointed the Chief Financial Officer today, also very pleased that you may have seen the announcement yesterday, Andy Bird, the former Chairman of Walt Disney International, will join us as an independent non executive director on May. Andy brings a huge amount of highly relevant experience and a real passion for education to what is already a strong and engaged board. So just to recap very quickly on the headlines, our financial performance was in line with expectations to the February with COVID nineteen impacting our businesses in March.
We have a strong balance sheet and ample liquidity. We're managing the business very actively in these highly uncertain times, cutting costs and conserving cash in those that aren't able to operate as normal and redeploying and scaling up in the areas of growing demand. And as you heard from Sally looking ahead to 2021, we will deliver a further £50,000,000 of annualized cost savings and launch the next generation of digital learning products that post the pandemic should be in even greater demand. And with that, Sallie and I will be very happy to take your questions.
Thank in And our first question comes from Catherine Kate from Goldman Sachs. Please go ahead. Your line is now open.
Good morning, everybody. Thanks for taking my questions. Firstly, maybe I could just ask on the OPM side. I appreciate that this is a business that you are sort of looking at the business model and how it can sort of shift to make it, you know, more more profitable going forward. But I guess my question is, is now really the right time to be, I guess, doing that sort of more internal process of looking inwards when there's so much demand externally for from universities to, you know, make this emergency sort of very drastic shift online.
You know, is is this really the right time to be taking the foot off the gas in terms of engaging with those universities? Is there a sort of longer term risk that you perhaps lose share given that we're facing such an unprecedented point in time where these universities are looking to shift online. So just keen to understand a little bit more there. And then my second question is just on virtual schools and whether or not the sort of boost that you're seeing at the moment is related to the sort of longer term programs that my understanding was that your virtual school's products were very much for students that were looking to homeschool sort of on a more permanent basis. So do you expect that this sort of near term boost will phase out or come out once sort of lockdowns and things like that normalize?
Or is this a sort of more structural shift that we should expect kind of persist going forward? And then finally, perhaps just on the shape of the group. Obviously, there's sort of two digital areas that you sort of alluded to that are going to continue to benefit from this shift to digital that's being accelerated by the current situation we find ourselves in. Those two businesses made up about 15% of revenue last year. Is that too little?
How are you thinking about scaling up those businesses? Or are you still pretty happy with the overall shape and footprint of the business? Thank you.
Thanks, Catherine. Well, I'll deal with the first and the third of those questions, and Sally will pick up on the one around virtual schools. So, I mean, first of all, on the shape of the portfolio, yes, we are happy with the shape of the portfolio. We have, you know, strong balance sheet, ample liquidity, plenty of scope to invest organically. And that's what we're doing in in both those businesses and that's the way that we'll continue to do so.
In terms of your first question, I think we should sort of separate two things. First of all, we were and are actively managing our portfolio of university partnerships and we are, you know, bringing some relationship to an end so we can focus on others where we see a the opportunity for a bigger and more strategic engagement. And that's what you see in the revenue performance in q one and what you will see for the rest of the year. And that's entirely consistent with the guidance we gave back in January. We're doing that so we can build a more profitable, more sustainable, faster growing business and that's reflected in the guidance we've given you for these businesses in the medium term.
But I didn't think I'd left you in any doubt, but just to be clear, you know, we are deploying all the power power of Pearson to help every university partner who wants it to help to scale online. And we have the scale and competitive edge to do that in a way nobody else can because we can bring our online partnership skills to bear. We can bring all our digital courseware to bear. As you heard, we're offering all of our online tutoring capabilities. So we are all in with our university university partners. Partners.
And I have to tell you they are very welcoming, very supportive, we and and this has just unleashed a whole amount of energy and creativity, spirit of partnership and collaboration both within the company and externally, which I am very proud of. So if I didn't communicate that as clearly as I should, please do not be on any doubt now. Thanks, Catherine. And then Sally will pick pick up on the virtual schools point.
Hi, Catherine. Yes. As you say, we've seen a huge increase, interest in our virtual school business, and where we've received applications and enrollments for the nineteen, twenty year where we've been able where we've been able to take them. Of course, looking forward, that interest in applications needs to turn into enrollments for the twenty twenty one year. I think we'll see people exploring this for the first time and realizing it's something that can work for them.
But I think the most important point to note is the the availability of these sorts of schools on a state by state basis. I think you probably know there are some states which don't have virtual schooling as things stand at the moment. And I think states are now looking at the possibilities of virtual schooling, probably wanting to prepare themselves should such should such an event happen again into the future and therefore more open to virtual schooling and therefore the possibility opens up to a greater number of students in those states to to to engage in virtual learning probably for the first time.
Thanks, Sally. Thanks, Catherine. Where are we going next?
Our next question comes from Tom Singlehurst from Citi. Please go ahead. Your line is now open.
Good morning. It's Tom here from Citi. Thanks for doing the call and taking the questions. Three, if it's okay. Firstly, on the testing, mean, from an economic perspective, sounds like getting the testing businesses back up and running as quickly as possible is the primary sort of driver.
I'm just wondering whether you can give us a sort of sense of sort of geographic shape. I if lockdown comes to an end in The U. S. And The U. K, does that mean the business largely is back to normal?
Or can you try and quantify which are the important markets to get back up and running? That was the first question. Second question was on higher ed course. I appreciate we won't really know until September, but one of the concerns that has really taken hold is that universities will be under pressure, in particular, in The U. S.
A lot of investors, I think, are looking at that through the lens of risk, falling enrollments and then less people buying courseware. But can you talk about some of the puts and takes there? I mean, can you quantify the number of international students and whether that's a particular risk variable for you? And can you also talk about the interplay between sort of public universities and the for profit and community college channels? And then the final question is the buyback you've taken out, what is the trigger for putting it back in?
Thank you. Okay. Thanks, Tom. So, Sally, do you want to pick up on the first and third of those questions? So they're running around testing and all around the buyback and then I'll answer the question around the power of course.
Yeah. Sure. So for testing, I think you're probably picking up particularly on our professional testing centers. Obviously, we had to close those in the March. And then there's going to be a phased return to those centers across the world with different timing.
So for example, in China, centers are starting to open back up now. As I think we've mentioned, we do have some centers that have opened back up in The U. S. In order to certify health workers. We're looking at opening some centers back in The UK, for example, for the GBSA driving theory and for ambulance workers.
So I think there'll be a phased return over time. One thing that we do know is there is a pent up demand. We hear that from our customers every day. People are really keen to take the certification and test for the things that they've been studying for for some time. If there's still social distancing when we wake the earth and back up, which which seems likely, then we will manage those centers to make sure that we protect people, both our staff and the people coming in to take tests.
But we will also make make sure we open those test centers for extended periods of time so that we can help our learners to take the qualifications that they so much want to. On the share buyback, I think we were clear this would pause the share buyback. And once the situation becomes clearer and the outcome to the year becomes clearer, we will
restarting the share buyback at that point.
Thanks, Sally. I'm I'm just expanding on the that your first question on testing. I mean, to use it to make a broader point. What times like this do is really sort of unleash speed, innovation, creativity. So for example, I think as Charlie mentioned, we have the best part of 200 professional testing centers in The US back open now to provide the ability to get thousands of health care workers into the frontline very quickly.
And the benefits of doing that, of course, more widely as well as the societal benefit is we're learning as to how you can operate those centers effectively in a social distancing environment. So that will help us as the sort of lockdown eases. And likewise, you know, something we've been worried about pushing on for years, which is how we do remote proctoring. We've seen a, you know, 350% increase in use and we've redeployed a lot of our test center administrators from working in center to acting as remote proctors. So there's a lot of opportunity here and we're learning a lot so we can respond respond quickly to what is gonna be obviously a highly uncertain and rapidly changing situation.
On your higher courseware point, I mean, yes. I think there is, you know, clearly there is concern about what will happen with enrollments around sort of international students. I think it's fair to say that the universities that have the highest number of international students are not the ones that tend to be our biggest customers. Customers. So So if if you you remember, most of our revenue comes from two year community colleges, two and four year for profit colleges, and obviously four year public universities.
Universities. They tend to have much larger numbers of students who live locally. And I think what we're seeing, you know, we're talking every day to large numbers of college presidents and working out how we can help them, how we can best help them. And I think what you're seeing is that most of them are planning on the basis that will probably be some sort of hybrid for for back to school in the fall. But there'll be some students, perhaps with locally who are on campus.
They're probably doing their lab sessions where you can do social distancing. They're probably doing tutorials which you can manage through social distancing, but they're not gonna be shots in, you know, 500 or 1,000 seater lecture halls. And frankly, they don't need to because using our digital courseware and a lot of other capabilities that part of the learning process can be done, you know, remotely and safely in a in a in a virtual environment. So I think we are, you know, clearly, you know, it's a very uncertain set of circumstances. But I hope that gives you a a a bit of a feel for how it will play out.
And I think as important is to think about 2020 is to think about 2021 because this is an incredible opportunity for us to build much deeper and more strategic partnerships. And what's interesting is, actually, this is where inclusive access comes into itself because we built sort of enterprise level partnerships with universities around making, you know, textbooks into digital courseware enabled them to access it at better prices. But then that provides an opportunity to expand that relationship in a much more strategic way. So, yes, there will be short term challenges, but I think it will be something of a hybrid for back to school and the better the job we do of supporting our customers now, the better it will be for us in '21 and beyond.
Thanks, John. Very clear. Thank you.
Our next question comes from Matthew Walker from Credit Suisse. Please go ahead. Your line is now open.
You very much and good morning, Good morning. First of all, could you say just for Q2, how many test centers do you have in total? What percentage will be closed in Q2, do you think? And for the rest of them, what do you think the utilization level will be? And maybe give us a bit more color about the business model there.
Is it based on the absolute numbers of tests taken? And are some tests more valuable to you than others? That would be helpful. And then maybe one for Sally. On the discretionary savings in 2020, how much mitigation of the fall in international profits can you do through cost savings in 2020?
And then one last one for John, which is, obviously, you said you're deliberately slowing the OPM transitioning to a new model. Can you remind us what is the new model for OPM? Why are you slowing it? I mean, I know, for example, that or I thought, for example, that one thing you wanted to get from your OPM partners was the ability to use student leads that you generated from one partner to, if they didn't take up that partnership, to use them for other partners. And some people are okay with that, some people aren't.
What are the other elements of the transition to the new model? And how long until the growth recovers to the level 10% or whatever that we would normally expect in OPM?
Yes. So Sally, do you want to pick up on the second question?
Yeah. Sure. The discretionary cost savings that we have in place, you know, across various things, some costs relatively easy. Know, no one's spending any money on c and e at the moment. We're obviously focusing whilst we're not furloughing staff, we're making sure that we're focusing and and redeploying people, which means that recruitment isn't as high as it would have been in other circumstances.
And with things like marketing spend, with such pent up demand across the piece, there probably isn't the ROI on marketing spend that we would normally see. So that enables us to just take very sensible decisions around our cost base. International courseware and how that might play out over the next few months given the varying dates the schools would would return to school anyway and the impact of the pandemic is is uncertain, but we're working to offset as much of that with cost savings as we possibly can.
Okay. On your first question, Matthew, I think that's something like 22,000 professional testing centers that we either operate directly or we operate with partners around the world. So as you can imagine, it's quite hard to answer your question without having a detailed view of how, you know, global lockdown and social distancing will be eased on a on a country by country basis. I think what I can say is if you think that if you are if you are operating your system center using social distancing, then let's say you've got 10 seats in the center when you reopen, you've essentially got five, you know, you've essentially half the capacity of the center. So that's sort of how we are thinking about it.
So then we have the job of meeting the demands of large numbers of customers who want to see the ability for their candidates and students to take the test. So if you have the capacity of the network, you know, this is where the the sort of innovation and the and the the testing comes in. So if those centers are normally open for eight to ten hours a day, can we work with our partners and the test takers that we open the test for more hours a day? And can we complement those tests with much greater use of online proctoring? And in some cases, can we work with our testing partners to shorten a test?
So, you know, if there's a professional test that often might take as long as nine hours, do you just the regulatory body feel that for a certain period of time, actually, if we could shorten that test to to five hours, we can still be confident of establishing the level of competence that they can then safely practice. So there's there's not an easy answer to the question, but I hope that gives you a sense of the way that we're thinking it and how we're trying to get as much stand up as much capacity as we can as quickly as as we can. And then on the the sort of on the OPM, I mean, let's just be clear here. You know, all all that we've done really is there are a relatively relatively small number of legacy contracts with universities where we may have been just running one program for them. And frankly, that's not the way to build a strategic relationship.
So really what we're trying to build is more enterprise type relationships of the sort that we have with Arizona State University or Merrillville or that we're developing with King's College here in London or a sort of a deeper relationship that at least rep East approaches a whole business school or a whole suite of programs. And that's a much more effective way for us to operate, and frankly, it's a much more effective way for the for the university to operate. Some other examples of transitioning to the new model, learn UK that we are launching launching in the next few weeks actually is built on a pathways framework that we developed in our US business. And how this essentially works is, you know, we bring together something over two for the launch of this program, 200 courses. Some of them from within Pearson, others generated by a range of partners.
And the learner has three choices. They can browse, they can search, or they personalize. And so they come in and say, you know, I I have these career history and skills. I'm interested in these potential career paths or new jobs. I have this amount of time that I can study and I have this amount of money that I could spend.
And it then curates and personalizes and advises and then directs them to the relevant partner. Another example is all of our first year introductory courses at American universities, you know, that we built on the back of our major introductory textbooks. We have built purely digital courses, self paced, which are regulated by regional accrediting bodies in America. So you could see, for example, how a university struggling with this challenge of our students gonna be on campus or are they gonna start to study the first year virtually, can integrate that into their offering. We've also taken some of the fantastic courses that exist in edX.
Huge wealth of range and created them in a way that is much more accessible and usable. And that too can be bundled with the university's own offerings and partnerships. This is a much, much richer, higher value business where a world which is what the old world of OPM where essentially we were, you know, identifying, recruiting, and enrolling students on the behalf of the university. University. That's still an important role.
But in the spirit of the world's learning company, there's a huge amount more value that we can add and that's the way that we are building and repositioning the company. And that's why after a pause this year, I think in the the guidance we gave you in February, we talked talked about the medium term outlook. You will start to see the the growth of the business accelerate from next year and then onwards. Okay. Thank you.
Thank you.
Our next question comes from Nick Dempsey from Barclays. Please go ahead. Your line is now open.
Yes. Good morning, guys. I've got three left. So first of all, do you can you comment on the kind of share you might have lost in North American courseware, particularly in January? I mean, back on the February 12, Cengage was predicting flattish growth for calendar Q1 twenty twenty.
They'd already seen January, which is clearly important month. So I appreciate what you're saying about campus bookstores in March, but it seems a bit unlikely that, that would be able to massively change their expectation for that quarter. So yes, if you could talk about how you've done versus them in Q1. Second question, the $50,000,000 of savings that you're flagging for 2021 on a structural basis, when we're forecasting for 2021, how much should we think about just adding $50,000,000 to operating profit because those savings weren't there before? Or to what extent are those going to be eaten up by elements of investment or costs coming back from the 2020 savings?
So yes, how much we think about on a net basis when we're forecasting? And the third question, just in terms of U. S. Student assessment, I think you've talked about 50% of that business being supporting the providers of the SAT and ACT tests. And you were talking about that as fairly resilient because they get taken through the year.
Now as lockdown kind of persists, could we expect some negative impacts for those businesses and therefore the knock on for you as a provider?
Okay. Sally will take the sec the second and third one and then I'll come back and pick up on the first one. But just before I do, I I there's a little bit of a crack on the line. What percentage of our school assessment revenues did you think came from?
I I yeah.
I I I thought it was somewhere just just shy of 50%. I think someone might have said before, but I'm guessing a little bit.
Yeah. I think it's significantly lower than that, but I'll let Sally pick up on the school assessment and the cost savings point and then I'll talk about our competitive performance in Higher Ed.
Yes. Thank you. Hi. So the GBP 50,000,000 of savings, so that is a program that we were working on in February and in March before the pandemic took place. We decided to put that on pause in the circumstances and given the uncertainty, but we are picking up and implementing taking those actions now through the rest of the year.
So if you had a model for 2021, those GBP 50,000,000 of savings are on top of that model. The savings that we are making this year are on discretionary costs and are to protect profit in this year. So I would look at those two things differently. On U. S.
Student assessment, the revenues that we see across the year are broadly in in sort of three buckets. First of all, the work that we did in the first part of the year, which have been billed with billable given the progress that we've made for our partners across that time frame. And actually, the work that we do and bill at the back end of the year is for next year's testing. So it's a proportion of that that is then impacted impacted by people deciding to either defer or not to take tests. And I think as we've said, we see from the decisions that were already made
a
GBP 20,000,000 impact to profit for 2020. And then a risk of further impacts, but those are pretty modest in terms. So I think we talked about GBP 15,000,000 plus and a possible extra £15,000,000 in our COVID relief. I think you'd probably get to the same place today. It's just some of those are now more certain.
Okay. Thanks, Sally. And then Nick, on your on the first question you asked. So we're with April brings us to the end of the the spring back to school season, which is the sort of second semester. And really that pretty much flows through from the decisions that colleges made for the for the fall back to school.
So I think what we told you back at the the start of the year that is a result of the major changes that we've been making in the business and the disruption that brought in its way. We thought that we lost about a point and a point to a point and a half of course adoptions. And I think that will have flowed through to the spring adoption season as well. The good news is that we are now now through the supply chain challenges that we're still flowing through are now done. So we have seen actual returns fall significantly in the first quarter of the year, carrying on into into April as we as we saw in the in the in our opening comments.
And our new Salesforce model is going very well. So if you remember, we've got a small Salesforce that we have previously, generalists, so they sell across the whole of the portfolio. But the early indications is we are performing well and we would certainly expect to at least stabilize our competitive performance before back to school. And you never know, maybe we might actually start to claw back from share, but it's far too early to say that yet. And the other point I would make is that clearly, you know, with our balance sheet, financial strength, we're not having to cut the salaries of our sales force and we're not facing major disruption as people have to in the years ahead do the things that we've already done.
So, you know, we've taken it on the chin. We took the pain of losing a bit of share, but that's behind us now with better shape. And I think over time, you'll see the competitive performance improve again.
Thanks, Nick. Thank you.
Where should we go next?
Our next question comes from the line of Adam Berlin from UBS. Please go ahead. Your line is now open.
Thanks. Good morning, everyone. Three questions from me. The first question is, if we were in a scenario where domestic U. S.
Students decided significantly to postpone starting university in September because they're worried about getting the virus on campus, when would you get visibility visibility that, that was happening and that trend was emerging? The second question is about U. K. Assessment. I just wanted to understand what you're saying about The U.
K. Assessment business because I think the original trading statement said it wouldn't be too effective, but I think that Sadi, you made the point this morning that you thought actually you would see some impact. Can you just explain a little bit more what's happening with U. K. Assessment?
Are you being paid for these kind of virtual exams and how that's working? And the third kind of more of a longer term question about schools courseware outside The US. Clearly, lots of school students are now experimenting with different forms of online learning. What's your strategy in the area? If schools switched from textbooks to these more varied online ways of learning on iPads, how are you positioned for that?
And what impact could that have in your business longer term? Thanks.
Okay. Thanks a lot. I will take the the first and the third, and I think, see if Sally wants to add anything on the second question. But I think we've said quite consistently that there would be a a modest impact from UK qualifications and that remains the that remains the case. But Sony may wanna add something to that.
On your on your on the third question around the international courseware, I mean, I think what I think it's it's what I said earlier. I think what we'll see is the pandemic will accelerate trends that are already on the way, but I don't think it will fundamentally change things out of all recognition. Recognition. And what we're seeing in those international markets is that, you know, gradually over time, print is moving to digital and we are doing a very good job of of leading that transition. We tend to perform better in the shift.
It's also important to note that textbook price points are much much lower in our international school higher ed and ELT business system they were ten years ago in US college publishing. So there's not the same sort of economic threat to us in the shift from analog to digital in the international world. And actually, there tends to be more of an opportunity because it can enables us to build deeper relationships and you've seen that for example an example in in in China, you know, the the government was very keen to see sort of no no no non stop learning, I think was the phrase that there should be no interruption just because the schools will close. So we formed a major, you know, work with a a start up there called NamiBox and Microsoft, and the three of have moved quickly to put together a new business model that has got a lot of support and traction. We we made it available to free in the short term, but I think it's proved very valuable.
I think in time we'll be able to to charge for it. So I think that's a proxy for what you're seeing in in in markets around the world. In terms of enrollments, I mean, know, the I think that sort of national clearing house data that you see tends to be a a sort of a lagging rather than a a leading indicator. But you will start together, you know, we obviously have a, you know, extensive network of, you know, we have relationships with over a million faculty. We have very good strategic relationships with many university presidents.
We have our authors on campuses across America. So we have a very sort of good insight insight and feel. And as you would expect, we are constantly calibrating and we'll, you know, reflect this intelligence as we work through the year. And I think our the framework that we've given you enables you to get a a feel for that and obviously we'll update through the year as we go. As I say, I think, you know, I think there are a lot of things can change, but I think the the working assumption would be wise to assume that there will certainly be significantly fewer international students, but most universities will be working very hard to try to ensure that their course is start on time, but with a mixture of face to face and purely online learning.
But we'll see how that unfolds over the next few months.
I think I've gone Sorry. Yeah. So so to be clear, the financial impact on this form for us this year will be modest. So what is happening is, obviously, kids aren't taking GCSE and a level exams this year, but they will still get a qualification, so a grade for each of the exams that they are registered for, and that is through teacher assessment. And we are here to support those teachers in making that assessment, gathering those marks and then the statistical analysis that we take on top of that to make sure that kids get the qualification they deserve and that is fair and we will be making that award.
There are some ancillary products around that. So for example, revision guides, I think probably most kids aren't going to be revising for the exams that they are going to be taking. But the financial impact of that is very modest.
Okay. Thank you. Thank you.
How are we doing? Any more
We have last We have our last question from Patrick Wellington from Morgan Stanley. Please go ahead. Your line is now open.
Yes. Good morning, everybody. Amazingly, still got three questions. The first one actually is on going back to Matthew's question about the OPM model. You bought Embanet in 2013.
We had a big reshaping of the business or the contracts within the business. I think it was in 2018, there were a lot of contracts came to an end, and there was a sort of hiatus at that point while a lot of new contracts were resigned. There was some quite bullish talk about how the growth was going to pick up at that point. And now we're getting a further reshaping of the business in 2020. And throughout this period, the business has been fairly profitable.
So how confident can we be that we've actually got a stable model going forward in OPM? That's the first question. Second one is just about online. John, you gave an interview to Reuters in which you talked about the amount of activity that was going on in online and everything that was happening. But you also said it would have very little short term profits or financial impact, revenue impact.
I'm kind of confused as to why. I mean, why don't you and this is the moment when everybody wants your products, why don't you charge for them? And in that context, also, if you could give us an update on connections, where I think in the March statement, there were 2,000 additional enrollments, which actually seem to me quite small in the context of what's going on. Maybe you can put that in context or maybe update the number. And then thirdly, one for Sally.
In this new environment, I'm still getting to grips with the CHF $449,000,000 of enabling costs and what they truly are. Are they fixed costs? Or are they quasi fixed costs? What's in them? And if we look at that CHF 50,000,000 of cost savings that Nick was talking about earlier, is that going to be CHF 50,000,000 off the CHF $449,000,000?
Or is it going to be in the divisions or how do we model that number?
Sally, do you want to pick up on the thanks, Patrick. Good morning. Do want pick up on the last of those, Sally, and then I'll pick up on the other two?
Yes, sure. So those central costs, we call them enabling functions. They are services that support the whole of our business. So they would include technology, enterprise technology costs, finance, HR, legal, all of those sorts of things and we support each of the businesses, which is why we show them centrally. There is an element of salary cost depreciation in there, which was ethics in the short term.
Obviously, we've demonstrated those are things that we look at on an ongoing basis. So around about half of those costs would be sort of salary depreciation costs, around about half of those costs would be more sort of very short term flexible in nature. The £15,000,000 of the 2021 savings, I think you can assume that that will predominantly come out of that cost base.
Okay. Thanks, Sally. And then picking up on your other two questions, Patrick. So I think look. I think the the online program management has been, frankly, challenge for Pearson and for every other player in the space because what's clear is that, you know, if you take any sort of medium term view of the world, you are going to see more learners wanting to learn fully online.
And that's biggest growth opportunity that universities have ahead of them. But frankly, finding a way to be sure that you can scale that business in a sustained and profitable way. Like the early years of many nation industries, it's not always clear. You know, you're clear on that there's a big growth opportunity, but you're not necessarily clear as to what the best business model be. And we had to sort of work away and iterate and test.
I think we now have a model for the reasons I described earlier and answer to the question. I think it was to to Matthew why why we believe we're now there? And why should you have confidence on it? Because, you know, the we look at relationships we have with people like Arizona State University, with people like Kings, with people like Maryville University, the relationship we're building with Northeastern University of Boston. And those are sustainable, mutually profitable relationships.
So if we can do more and scale more of those, that gives us confidence that we will over time have a business that that works and will scale. And I, you know, just to broaden the question out a little bit, you know, we are about to go into a, you know, significant global recession in every recession since the second world war when unemployment goes up, college enrollments go up. I think that will hold true again this time, but I think it will happen in a very different way because I think this time, learners are gonna want to be doing shorter courses. They're gonna be doing more flexible, stackable credentials. Credentials.
They're They're gonna gonna want to do things that are much more directly related to jobs. They're gonna want to do it at much more affordable prices. They're gonna want to do it online, and they're gonna expect fantastic experiences and great outcomes. And so this is where actually, actually finally something that I wanted to see for the last ten years, which is actually our online program management business and our coursework business rather than operating our own parallel tracks have the opportunity to converge. That opportunity now exists and that's what we're going to to take.
And then, Patrick, you know, you and have known each other for a long time. I don't think you would expect to the company like Pearson. When we face the sort of crisis that we faced in March, my first instinct is not how do I make money. My first instinct is how do I help my customers. And that's what this company has done and I'm proud of the fact that we've responded in that actually, I do think that will be the best way to make money longer term because customers will remember how you behaved when they needed your help.
And by behaving in the way that we are, that's the best way of building a a faster growing, more profitable business longer term. The other key point is we are getting learning so much because suddenly we have millions more people using our digital products. We're not be you you heard me say, we're actually, you know, giving a lot of it away with, you know, products worth more than £25,000,000 in sales so far. But what we're getting in return is huge amounts of data, insight, insight, feedback, feedback, and that's gonna make us a better company with better products and that will make for a better business for the term. John, you're sure
the customers won't learn that the product is effectively free like so many things that people want to have online? They want it for free. Will they learn from this process that actually your product is free?
No. Because I'll give you to give you a, you know, to give you an example. In our higher education business where we had customers that had, you know, that were in the middle of courses and where they had students that had, for example, were using printed textbooks and they needed to transition online quickly, we provided that those eTexts and that digital courseware for free. But you might find in the same college three weeks later, a new, you know it's a new semester and a new course started. There, we didn't provide those products for free because we said, well, you can buy the digital courseware from the get go rather than buy the the print product.
So we're not doing it in a sort of, you know, a thoughtless reckless way. We've been very sort of considered about it. And I think it will, for the reasons I say, provide that opportunity longer term.
Thank you. And it's 2,000 extra enrollments or connections of a big number or is
Oh, sorry. I didn't answer. I didn't answer the question. So the the the bigger opportunity so if you think these are so Connections Academy is a a virtual school. So if you think that on the whole, people start at the start of the new school year.
So the big opportunity here is not people transitioning in, you know, in the in the in the dog days of the old academic year. It's the decisions that people make for August and September. And what we are seeing is very big increase, you know. So we're in the middle of our marketing campaign now for the August back to school and we're seeing very significant increase in lead generation. And when I mentioned earlier that we are redeploying people across the company, one of the places we are redeploying people to is not virtual schools business because we the one area where we would expect faster growth than we previously expected, if things flat pan out as we expect, is in virtual schools and we're adding more capacity.
To Sally's point, there are states that previously for, you political know, reasons, we're not interested, wouldn't accept virtual schools that are now reconsidering and rethinking. And we're also opening up some interesting international opportunities. So we're launching a virtual school here in The UK. We have a partnership with Harrow School online that we are we are scaling up. And there's also some interesting opportunities in places like the The Middle East.
So I think our online school business is an area where you you will we would very much expect to see good growth for the rest of the year.
Right. Thank you. Okay.
Thank you very much. Oh, we have one last question apparently.
We do. From the line of Sami Kasab from Exane BNP Paribas. Please go ahead. Your line is now open.
Hi, Sami.
Good morning, John. I have two questions, please. The first one, The U. S. Has €30,000,000 more unemployed.
We know the historical relationship between the job market and the enrollment market. So given the discussions you're having with universities, John, how do you see The U. S. College enrollment trends developing into next year? Would you surprise to see a jump in college enrollment?
And secondly, you've referred to your Brazilian language school business, the South African higher ed business, the system as seen high margin business. You said there would be an impact, but you didn't quantify the impact. Would you want to elaborate on that, please? Thank you.
Okay. Sally, do want to pick up on that second question and then I'll answer the first one.
So I think these are areas where it is difficult to quantify the impact as things stand because the progression of what's going to happen is clear at the moment. We are doing everything we can to keep learning in an online environment, but in some cases that's more difficult than others. So I think we'll see how things progress in those countries and a quantification will be a possibility later in the year.
And then on your first point, Sami, I mean, clearly, very hard to know when we look into a u shaped recovery, a v shaped recovery, who knows what an employment employment will look like in in six months in a year's time. I certainly think that if you do if there is high unemployment, I would expect that to feed into higher enrollments in 2021, not in 2020. And to the point I made earlier, I think you will it will show itself in different ways than it did, for example, in the late two thousands. And I think whilst there will be growing demand, it will be much more focused around there'll be greater report propensity to shorter courses, things that are much more directly related to employment and and a much greater use of fully online digital courses, which in back to my answer to to Patrick's question is all the more reason why we're working so hard to to get a sustainable business model in OPX.
Thank you, John. Thank you.
Thanks. Thanks, Sami. Thanks to everyone for your ongoing interest in the in the company. Joe and Angela have been on the call today. And if you follow-up questions for them in the course of today, please let us know.
But for now, thanks and catch up again soon.
Thank you.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines. Yes.