Interim Results - Part 1

Pearson PLC
28 July 2003


28 July 2003



PEARSON PLC INTERIM RESULTS (unaudited)

Six months ended 30 June 2003


                                          Half year       Half year     Change -      Change -    Full year
                                               2003            2002  as reported    underlying         2002             
    
Sales                                       £1,665m         £1,813m         (8)%          (3)%      £4,320m
Business performance
Operating profit*                              £38m            £76m        (50)%         (71)%        £493m
Profit/ (loss) before tax*                    £(1)m            £26m           --                      £399m
Adjusted earnings/ (loss) per share          (2.3)p            0.5p           --                      30.3p
Operating free cash flow                    £(375)m         £(304)m        (23)%                      £305m
Statutory results
Operating profit/ (loss)                    £(110)m         £(111)m           1%                      £143m
Loss before tax                             £(138)m         £(188)m          27%                     £(25)m
Loss per share                              (20.1)p         (26.0)p          23%                    (13.9)p
Dividend per share                             9.4p            9.1p           3%                      23.4p
Net borrowings                              £1,897m         £1,957m           3%                    £1,408m



     *Continuing operations before goodwill, non-operating items and integration
                                                                          costs.

On track for the full year



•         Pearson makes most of its sales and all of its profits in the second
          half.

•         Revenues and operating profits were down in the first half, as
          expected, due to tough trading conditions in advertising and 
          technology businesses and phasing of book publishing revenues into the
          second half.

•         Strong momentum built for second half, based on significant market
          share gains and further cost reductions.



Strong competitive performances



•         Pearson Education takes the number one position in new US School
          adoptions; US Higher Education continues to grow well ahead of the 
          industry.



•         FT Group profits up as IDC remains resilient and cost controls reduce
          impact of advertising declines at business newspapers.



•         Penguin profits down in first half as expected; best-ever publishing
          schedule in the second half.



Continuing efficiency gains



•         Ongoing cost reductions offset tough trading conditions in business
          newspapers and technology publishing.



•         Further integration of school software and book publishing businesses.



•         Working capital management continues to improve.



Marjorie Scardino, Pearson's chief executive, said:



"We are confident about the full year because we are making the most of our
strong market positions and operating on much lower costs. Our book publishing
operations are proving resilient and performing well ahead of their competitors.
Our business newspapers, with lower costs and improved content, will bounce back
strongly when business advertising recovers."

Financial review



Sales in the six months to June 30, 2003 were £1,665m, 3% lower than in the
first half of 2002. Sales were affected by tough trading conditions for our
business newspapers and technology-related operations, a shift of business into
the second half of the year at our education and consumer publishing businesses
and the absence of the one-off, 2002 Transportation and Security Administration
(TSA) contract. Operating profit was £38m versus £76m last year, due to business
phasing. Adjusted earnings per share fell from 0.5p to a loss of 2.3p.



Operating free cash flow was £71m lower at (£375)m. The two main factors were
business phasing and a receivable due from the TSA. Improved inventory
management resulted in the average working capital to sales ratio in our book
publishing businesses improving to 31.9% (from 32.8% in 2002). Total free cash
flow improved by £8m to (£381)m, helped by lower finance and integration
charges.



On a statutory basis, our loss before tax for the half-year improved 27% to
£138m, helped by a lower (non cash) goodwill charge of £148m (£182m in 2002).
The loss reflects the fact that Pearson makes all its profits in the second half
but amortises goodwill evenly through the year.



Pearson's net borrowings, which are at their peak at the half-year stage, were
3% lower than last year at £1,897m. The board has declared a 3% increase in the
interim dividend to 9.4p.



Outlook



At this stage the outlook for our major businesses is:



•         At Pearson Education, we expect the US School industry to grow at the
low end of the 0-3% range and the US College industry to grow in the 5-7% range
this year. In both markets, we expect to grow ahead of the industry as we build
on the market share we gained in the first half.  Revenues and profits in our
Professional business will be significantly lower than last year due to the
continued recession in technology publishing and the absence of the one-off,
$400m TSA contract.



•         Though corporate and financial advertising remains depressed, the FT
Group should deliver profits ahead of last year. The FT Group is benefiting from
continued strength at IDC and further cost reductions across its business
newspapers. Those cost measures, together with investments in our business
newspapers, will increase the benefits of an eventual advertising recovery.



•         At Penguin, we are confident of revenue growth greater than the
overall consumer publishing industry, which we expect to be broadly flat this
year, and further profits progress. Penguin has its strongest-ever publishing
schedule and has made an excellent start to the rest of the year.



In the second half, we expect our interest charge to be similar to the
first-half level of £39m based on current exchange rates. We expect free cash
flow to benefit from reduced finance charges, working capital efficiencies and
lower integration spend.



For more information:



Luke Swanson/ Jeff Taylor          + 44 (0) 20 7010 2310



Pearson's interim results presentation for investors and analysts will be
webcast live today from 0930 (BST) and available for replay from 12 noon (BST)
via www.pearson.com. We are holding a conference call for US investors at 1500
(BST)/ 1000 (EDT). To participate in the conference call or to listen to the
audiocast, please register at www.pearson.com.



Video interviews with Marjorie Scardino and Rona Fairhead are also available at
www.pearson.com.

High resolution photographs are available for the media at www.newscast.co.uk.



Notes. Throughout this statement (unless otherwise stated):

1.        Growth rates are stated on an underlying basis, excluding the impact
of currency movements and portfolio changes. Pearson generates approximately 70%
of its revenues in the US. The average exchange rate for the first half of 2003
was £1:$1.61 (£1:$1.45 in the first half of 2002). The full year exchange rate
in 2002 was £1:$1.51;

2.        Adjusted figures are presented as additional measures of business
performance. They are stated before goodwill, integration costs and
non-operating items. Goodwill is amortised over no more than 20 years.

3.        The 'business performance' measures, which Pearson uses alongside
other measures to track performance, are included to provide additional detail
on business performance. They are non-GAAP measures for both US and UK
reporting. Reconciliations of operating profit, profit/ (loss) before tax,
adjusted earnings per share and operating free cash flow to the equivalent
statutory heading under UK GAAP are included in notes 2, 5, 6 and 10
respectively.


Pearson Education


                               Half year     Half year          Change -        Change -    Full year
£ millions                          2003          2002       as reported      underlying         2002                   
Sales
School                               487           519              (6)%              0%        1,151
Higher Education                     196           222             (12)%              3%          775
Professional                         244           285             (14)%            (6)%          784
FT Knowledge                           -            23                --              --           46
Total                                927         1,049             (12)%            (1)%        2,756

Operating profit
School                                12            12                0%           (26)%          115
Higher Education                    (43)          (32)             (34)%           (54)%          142
Professional                           5            29             (83)%           (81)%           81
FT Knowledge                          --           (9)                --              --         (12)
 Total                              (26)             0                --              --          326


Notes:



1.       In May 2003, Pearson and Edexcel agreed to create a new UK examining
body, London Qualifications, with Pearson taking a 75% stake. In the first half
of the year, Edexcel contributed £16m of revenues to our School division.



2.       At the start of 2003, we moved our Alpha consumer publishing imprint
from Pearson Education's Professional division to Penguin.



3.       In January 2003 we restructured FT Knowledge, selling its corporate
training arm and integrating its remaining businesses within the FT and Pearson
Education's Professional business.



Sales at Pearson Education were down level with last year. Pearson Education
faces tough comparisons throughout 2003 due to the absence of the one-off, $400m
TSA contract (which contributed $55m/ £38m of revenues in the first half of
2002).



Sales at our School business were flat.The US School industry has been affected
by state budget pressures, with some states reducing their planned spend on
textbooks, testing programs and software, or deferring purchases into the second
half of the year. However, adoption states are spending and our business is
performing very strongly and growing ahead of the industry.



In school publishing we expect to lead the industry in new adoption sales* this
year, taking approximately 30% of the total new adoption market (even though we
competed for only 85% of the adoption opportunities). We have successfully
re-entered the Social Studies market, securing approximately 33% of all Social
Studies adoptions and taking the leading position in the key Texas adoption. We
expect to win more than 40% of Secondary Literature adoptions, taking the number
one position in both Florida and California. We also have good early results
from the open territories, which buy textbooks later in the year.



Revenues at our US School testing business were slightly up, as it began work on
several contracts won last year. It continued to extend its market leadership,
even as some states delayed or reduced their testing programmes in the face of
budget pressures. In the first half we have won several major new testing
contracts in the US, including a five-year contract with the US College Board,
beginning in 2005, to process and score the constructed response part of the
SAT, the world's most widely used college admissions test. In May we became a
major player in UK education testing through our partnership with Edexcel, one
of the UK's leading examining and awarding bodies. Although, with budget
pressures, school software sales are down on last year, we have significantly
reduced costs and improved products by integrating our software and content
businesses, and we expect them to breakeven for the full year.



Outside the US, our English Language Teaching business grew 7%. We are
benefiting from strong demand for textbooks and online programs as countries in
Asia, Latin America and Europe integrate English language instruction into their
school curriculum.



* In the US, 21 'adoption' states buy textbooks and related programmes to a
planned contract schedule, which means the level of spending varies from year to
year according to this schedule. The 'open territory' states are those in which
local districts buy textbooks on an as-needed basis rather than on a published
state adoption schedule.






Our Higher Education business makes approximately three-quarters of its revenues
in the second half of the year, with major selling seasons in July/ August and
December, ahead of the two US college semesters. The business reports losses in
the first half as it invests in publishing, sales and marketing to deliver
full-year growth. Worldwide, sales were up 3% and increased investment moved
first-half losses up to £43m.



In the US, sales were up 4%. According to Management Practice Data, gross sales
for the industry were flat. Our share gains are based on a strong publishing
schedule with several successful first editions, sales growth of more than 20%
in custom publishing and the extension of our technology, particularly online
course management systems, into new subject areas such as economics, health and
physiology.



Revenues were down 6% in our Professional business and profits down sharply. The
key factors were the 2002 TSA contract and the continued recession in technology
markets around the world. Stripping out the impact of the TSA contract, the
Professional business is growing. We are benefiting from several major new
contracts won from Federal departments including Defense and Health and Human
Services, and the first full year of our contract to certify nurses in our 200
professional testing centres. These contracts were in start-up phase in the
first half, with profits coming through strongly later in the year.



Sales at our technology publishing business continued to decline with the IT
industry. Our costs are already some $80m lower than three years ago and we have
taken a series of further steps to reduce costs, both in the US and
internationally. In the second half we will benefit from the absence of
restructuring costs to implement these changes (which were absorbed in our
operating profit) and the normal phasing of the business, which is weighted to
the end of the year.





Financial Times Group



                               Half year          Half year            Change -     Change -     Full year
£ millions                          2003               2002         as reported   underlying          2002              
     
Sales
Financial Times                      102                115               (11)%        (14)%           224
Other FT publishing                   54                 55                (2)%        (12)%           105
Recoletos                             82                 74                 11%           0%           148
IDC                                  132                126                  5%           3%           249
Total                                370                370                  0%         (5)%           726

Operating profit
Financial Times                     (15)               (11)               (36)%        (38)%          (23)
Other FT publishing                    3                  6               (50)%        (54)%            10
Recoletos                             14                 14                  0%         (9)%            29
IDC                                   41                 35                 17%          21%            70
Associate and joint ventures           0                (6)                  --           --           (6)
 Total                                43                 38                 13%          17%            80




Note: In February 2003, IDC acquired S&P Comstock, a real-time pricing business.
In the first half of the year, Comstock contributed £13m of revenues to IDC.



Sales at the FT Group were 5% lower as the deep recession in corporate and
financial advertising continued to hit our business newspapers. Profits were up
17%, helped by lower internet losses, additional cost savings and further
progress at IDC.



Advertising revenues at the Financial Times continued to decline, falling 18% in
the first half of the year. Average daily sales of the Financial Times for the
six months to June were 461,000, a decline of 5% on the previous year. Although
FT.com also felt the effects of the advertising downturn, its revenues were
level with last year as paid subscribers grew to 57,000 (against 16,000 a year
ago). FT.com's audience continued to grow with 3.5m unique monthly users in
June, up from 2.8m a year ago.



The UK edition of the Financial Times has been successfully revamped with more
UK business news, improved design and a new weekend magazine. The FT's UK
circulation was 6% higher in May and June than in the four months before the
revamp (though still lower than in the previous year), and the magazine is
attracting new consumer advertising campaigns. We will launch a new Asian
edition of the FT in the Autumn, completing our global coverage. We have
continued to reduce costs at the FT, more than funding our investments in the
newspaper through £13m of further cost savings this year. We are taking
additional cost measures, including integrating our UK and European commercial
operations, which we expect to generate approximately £15m of cost savings in
2004.



The advertising recession also reduced profits at Les Echos and FT Business.
Average daily circulation at Les Echos was 117,000, a 3% decline that was
significantly better than the overall newspaper industry in France. In September
we will launch Les Echos in a new format, broadening its appeal to readers and
advertisers. At FT Business, advertising volumes were approximately 20% lower
but a series of cost reduction measures enabled us to maintain double digit
margins.



At Recoletos (Bolsa Madrid: REC), our 79%-owned Spanish media company, sales
were level with last year. Advertising revenues were down 3% overall and 14% in
Recoletos' business and finance division. Circulation at sports newspaper Marca
increased a further 4% to 378,000, but declined 6% to 46,000 at Expansion,
Spain's leading business newspaper. All of Recoletos' major titles are gaining
readership share.



Interactive Data Corporation (NYSE: IDC), our 60%-owned asset pricing business,
increased revenues by 3% and operating profit by 21%.  It is benefiting from the
complete integration of the Merrill Lynch pricing business; its latest
acquisition, real-time pricing service Comstock; and good growth from its high
value pricing services. Although revenue growth has been dampened by tough
conditions in the financial services industry, renewal rates in IDC's
institutional business have remained high at 95%.



The FT Group's Associates and Joint Ventures broke even in the first half
(against a loss of £6m in the first half of 2002). FT Deutschland, our joint
venture with Gruner + Jahr, grew circulation 11% to 91,000 and increased
advertising revenues, and we are considering further expansion. The Economist
Group, in which Pearson owns a 50% stake, increased profits despite the
difficult advertising market, with weekly circulation at The Economist up to
more than 900,000 (from 838,000 in the first half of 2002).



The Penguin Group



                              Half year     Half year        Change -         Change -    Full year
£ millions                         2003          2002     as reported       underlying         2002                   
Sales                               368           394            (7)%             (3)%          838

Operating profit                     21            38           (45)%            (45)%           87





Note:  At the start of 2003, we moved our Alpha publishing imprint from Pearson
Education's Professional division to Penguin.



The Penguin Group's revenues and profits declined, as expected, in the first
half of the year. Our schedule of major frontlist titles is strongly weighted to
the second half and the war in Iraq dampened US consumer spending in general and
backlist sales in particular in April and May. Penguin's US sales were down 4%
in the first half, in line with the overall US consumer publishing industry.
Sales were up 4% in the UK, with strong performance from non-fiction titles
including Michael Moore's million copy selling Stupid White Men, Antony Beevor's
Berlin and Ellen MacArthur's Taking on the World.



Though the industry remains soft, we have seen a pick-up in June and July, with
Penguin making an excellent start to the second half of the year. John
Steinbeck's East of Eden has sold 1.2 million copies in the four weeks since it
was selected for Oprah Winfrey's Book Club. Kate Remembered, Scott Berg's
account of 20 years of conversations with Katharine Hepburn, was published in
mid-July and we have already shipped more than 680,000 copies in hardback.



Penguin's second-half publishing list is its strongest ever. Many of our most
popular and consistent best-selling authors have major books scheduled for
publication in the Autumn. In the US, they include Patricia Cornwell, Nora
Roberts, John Sandford, Nathaniel Philbrick, Amy Tan, Jan Karon, Garrison
Keillor and Terry McMillan; and in the UK, Michael Moore, Simon Jenkins, Griff
Rhys Jones, Pat Barker, Lisa Jewell and Lesley Pearse. Penguin is publishing new
books by Tom Clancy and Clive Cussler in both markets. In September The English
Roses, the first of five illustrated children's books by Madonna, will be
published in 42 language editions in 100 countries. Penguin is the distributor
in the US and publisher in other English language markets worldwide. Dorling
Kindersley is also on track for a strong second half, led by Tom Peters'
new-style business book Re-Imagine, Earth, the definitive family reference book
on the planet, and America 24/7, which captures more than 1200 images
documenting the lives of people in every US state in a single week.



Penguin and Pearson Education continue to collaborate on joint publishing
initiatives and programmes to capitalize on the scale they enjoy as the world's
largest book publisher. Having successfully integrated Pearson Education and
Penguin in Australia and Canada, we are now moving to shared back offices,
technology, warehousing and distribution in the UK. This integration programme,
which will cost £20m in 2003, will generate £20m of annual cost savings
worldwide from 2005, shared between Penguin and Pearson Education.



ENDS





Except for the historical information contained herein, the matters discussed in
this press release include forward-looking statements that involve risk and
uncertainties that could cause actual results to differ materially from those
predicted by such forward-looking statements. These risks and uncertainties
include international, national and local conditions, as well as competition.
They also include other risks detailed from time to time in the company's
publicly-filed documents, including the company's Annual Report on form 20-F.
The company undertakes no obligation to publicly update any forward looking
statement, whether as a result of new information, future events or otherwise.



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