UBS Warburg Conference New York City December 10, 2002

UBS Warburg Conference

New York City

December 10, 2002

International14%

US School23%

US College14%

Penguin19%

FT19%

US Professional11%

December 1998:$4.2 bn Simon & Schuster acquisition

September 2000:$2.5 bn NCS acquisition

December 1998:$4.2 bn Simon & Schuster acquisition

#1 in educational publishing (school & college)– Sustained market leadership

Benefits of scale– Integrated benefits delivered; now working across book

publishing

Cash generative– Consistent cash conversion; scope on working capital

Value creation– Earning our cost of capital

#1 in Assessment & Training– All major contracts renewed; new business won

#1 in Enterprise & Curriculum software– Strong competitive position; new products launched

Benefits of scale– In products and markets

Good cash profile– Lite working capital

Value creation– 15% CAGR in Revenues; 20%+ CAGR in operating income

September 2000:

$2.5 bn NCS acquisition

Software9%

Testing & Assessment

10%

Publishing70%

Services11%

2002: breadth & depth of products and customers

School & ELT42%

Federal18%

College29%

Professional11%

Products Customers

Shaded Areas Indicate Domestic

Note: Estimate of ’02 revenue breakdown

What is Government solutions?

How fast can educational publishing grow?

Does “Integrated Learning” still apply?

What is Government Solutions?

What do we do?

Is it a good business to be in?

How does it change the revenue/margin/cash mix?

We do for federal agencies what we do for state education boards and local school districts

Manage data

Score applications/tests

Enable them to share information

Support education and training

and …

Deal with public inquiries

Government Solutions: What do we do?

“[President Bush] has laid out a plan to transfer as many as 850,000 government jobs – nearly half the federal civilian workforce – to private companies as a way to save money and improve performance.”

Government may make private nearly half of its

civilian jobs

The New York Times, November 15, 2002

Government Solutions: Is it a good business to be in?

Strong revenue growth– Can come in spurts– Broader contract portfolio being built

12%+ margins– Scope for improvement

Cash– Modest capital investment– A good customer

Government Solutions: the revenue/margin/cash mix?

What is Government solutions?

How fast can educational publishing grow?

Does “Integrated Learning” still apply?

How fast can educational publishing grow?

School: Increased federal funding or lower state and local tax revenues?

College: Market-wide growth or Pearson-specific?

School & College: 1990s’ growth levels sustainable in the 2000s?

School: Increased federal funding or lower state & local tax revenues?

No benefit from new federal funding

A quieter adoption year

Open territory spending down on ‘01

2002

School: Increased federal funding or lower state & local tax revenues?

Pearson competing for more adoption dollars– 65% in ’02; 85% in ’03-’04

School spending lags recession

Reading First

What gets tested, gets taught, gets bought

2003 - 2004

College: market-wide or Pearson-specific?

Strong market-wide growth– Demographics– Jobs market

And Pearson out-performance– Full benefits of integration– Addison Wesley matching Prentice Hall

performance– Technology and Custom Publishing

leadership

School & College: 1990s’ growth levels sustainable in 2000s?

Some cyclicality in K-12 markets– Adoptions schedules– State and local budgets

For 20 years, K-16 markets have grown faster than:– Enrollments– GDP– Overall education spending

This trend should continue:– Standards-based learning– No Child Left Behind– Economic value of a degree

What is Government solutions?

How fast can educational publishing grow?

Does “Integrated Learning” still apply?

Does “Integrated Learning” still apply?– Will schools pay for online content &

services?– Is there demand for “integrated

learning”

Will customers pay for online content and services?

$140m in curriculum software sales

$100m in enterprise software sales

Is there a demand for “integrated learning”?

No Child Left Behind creates the demand – Test– Report– Remediate

E-rate funding has created the platform

Where students, parents, teachers, and administrators harmonize their efforts for maximum student

achievement.

A comprehensive, integrated family of Web-based applications that:– Revolutionizes K-12 education with a new category of

technology: the online education community– Meets NCLB requirements with integrated standards-

aligned content, assessment, student performance management, and parent communication

– Helps all members of the education communitystudents, parents, teachers, and administratorsachieve success

What is Government solutions?

How fast can educational publishing grow?

Does “Integrated Learning” still apply?

We like working for the federal government

The future of educational publishing still looks pretty bright

Integrated Learning is coming fairly soon to a school near you