Sunday, July 28, 2013

Penguin sales rise but loses money on setlement and merger

Publishers Lunch

Pearson reported sales for Penguin for the last time, covering the first six months of 2013, right up to the creation of Penguin Random House. The trade publisher had a strong start, with books from Khaled Hosseini and Sylvia Day helping to power a 16 percent overall (and 6 percent underlying) growth in sales, to £513 pounds, up from £441 a year ago (which had been a weak report for Penguin). Adjusted operating profit rose £6 million, to £28 million for the period -- but that was more than wiped out by £46 million in "costs relating to the formation of Penguin Random House."

As was the case in the last reporting period, a substantial portion of that amount -- probably about 70 percent, though the company did not provide a breakdown -- is due to the additional damages, fees and costs Penguin agreed to pay in settling the ebook pricing lawsuit. Six months ago Pearson took a £32 million charge, of which $40 million was attributed to the suits. The final settlements cost over $90 million in payouts.

Former Penguin Group ceo -- and now chairman of the board Penguin Random House -- John Makinson confirmed that Pearson will continue to incur "further restructuring costs" related to the merger and the complete "disengagement" from a variety of shared Pearson services "will take us certainly into 2014 and in some places into 2015." Makinson officially stepped down from the Pearson board on July 1 and is focusing on his new role as "independent chairman" of the new Penguin Random House. He recently returned from the world tour of Penguin Random House offices with ceo Markus Dohle.

In their last internal memo on Penguin US sales alone, David Shanks and Susan Petersen Kennedy note that "2013 has been characterized by disruption and distraction," but the company's "first-half performance proves that you learned from the disruptions and tuned out the distractions.... You made the books work, despite everything." As for the merger preparations in particular, "Enlivened and perhaps empowered by a glimpse into the future, you rose to the occasion and surpassed our expectations." On the results themselves, "Penguin US had a great first half. Net sales were up over last year by double digits, and that growth was driven by all segments of the business (frontlist, backlist, and digital) and all publishing groups (hardcover, paperback, and young readers)."

Makinson indicates the company's units performed well all over, "even in markets we know are quite tough" such as Australia and South Africa, and he said that recently acquired Author Solutions "is coming along well" (despite pending legal action against the unit). They are no longer forecasting future performance post-merger, though Shanks and Kennedy indicated "a strong start to the second half" in their letter and Makinson "sees no reason why" Penguin's positive results "shouldn't remain the case in the second half of the year."

The company declares in the release that "ebook revenue grew strongly" though the numbers confirm the same greatly diminished growth rates that are being reported across the industry. eBooks comprised 21 percent of worldwide sales (up about 10 percent from a year ago, when they account for 19 percent) and 33 percent of sales in the US (up only 6.5 percent, from 31 percent a year ago).

On some of the confusion around whether US accounts have shifted completely to new ebook sales terms with Penguin as a result of the legal settlements, Shanks indicated they "are still not finalized on a lot of our new contracts" but expects that will happen "within the next month or so." (So Penguin may still be actually setting the price with some accounts, though those accounts are free to exercise their right to offer discounts even in advance of new contracts.)

Overall, Pearson's sales rose 7 percent to £2.76 billion on strong education sales, but adjusted operating profit fell by £50 million to £137 million on continuing restructuring costs and new product investments, and the company reported a rare statutory loss of £9 million, or one pence per share. Sales were well ahead of analysts' expectations, and Pearson's stock is up over 5 percent today as a result, reaching its highest point in years.

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