UPDATE 2-Pearson shares drop after warning of earnings shortfall

Thu Jan 23, 2014 5:34am EST

* Sees EPS after restructure charges 70p vs f'cast 76p

* Sees FY op profit 865 mln stg vs f'casts just over 900 mln

* Cites higher restructuring costs, poor U.S. demand

* Reaffirms need to push ahead with restructuring

* Shares fall more than 8pct, hit lowest since July (Adds shares, background)

By Kate Holton

LONDON, Jan 23 (Reuters) - British publisher Pearson Plc warned its 2013 earnings would be lower than expected due to higher restructuring costs and poor demand for its North America education business in its key selling quarter, sending its shares down over 8 percent.

Pearson, the 170-year-old education and media group which is in the middle of a transformation under new leadership, said on Thursday U.S. state budget pressures, fewer enrolments and higher investment needs had hit its margins in the fourth quarter.

The group said the poor performance, which wiped some 900 million pounds ($1.5 billion) off its stock market value, reaffirmed the need to push ahead with a restructuring to focus on digital services, emerging markets and an improvement in its core U.S. education division.

"With trading conditions still challenging in 2014, this further underlines the importance of the work we started in 2013 to reduce our established cost base and redirect our investment towards our biggest future growth opportunities," Chief Executive John Fallon said.

Pearson, which for years beat market expectations as it rolled out its education and testing business around the world, was hit by a string of managerial changes and slowing growth in 2013, Fallon's first year in the job after he took over from the 16-year veteran Marjorie Scardino.

With earnings growth stalling, Fallon embarked on a 150 million pound restructuring programme in February to boost margins and counter tighter educational budgets. Three months later the group announced a further reorganisation with the creation of new sectoral and geographical divisions.

STRUCTURAL PROBLEMS

The company also folded its Penguin book division into a joint venture with Random House, owned by Germany's Bertelsmann.

Analysts said on Thursday the trading update, revealing higher restructuring costs, fewer savings and a weak outlook for 2014, suggested structural problems within the business were accelerating.

In education, where it is the world leader, it is seeking to grow in emerging markets to tap into the rise in spending by a burgeoning and aspirational middle class.

"This looks like overall 'hope deferred' rather than a fundamental change, but shares are likely to come off today as some may lose faith given continuing challenges," Investec analysts said in a note to clients.

Shares in the group were down 8.1 percent at 1,193 pence by 1018 GMT, having fallen as low as 1,185p - their lowest since July.

The group, which also owns the Financial Times newspaper, said it now expected earnings per share after restructuring charges to be around 70 pence, compared with consensus forecasts of around 76p.

It said earnings on an adjusted basis before restructuring charges would be around 83p, in line with previous guidance.

Operating profit for the year was forecast at 865 million pounds, compared with consensus forecasts of just over 900 million. The group will report full-year results on Feb. 28.

($1 = 0.6030 British pounds) (Editing by Neil Maidment and David Holmes)

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