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Pearson PLCÂ (PSO 0.80%)
Q2Â 2020 Earnings Call
Jul 24, 2020, 3:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello and welcome to today's Pearson Interim Results. All participants will be in listen-only mode and afterwards, there will be a question-and-answer session. And just to remind you, this is being recorded.
Today, I'm pleased to present John Fallon, CEO, and Sally Johnson, CFO. Please begin.
John Fallon -- Chief Executive Officer
Good morning, everybody. Thanks for joining us. As you just heard, I'm John Fallon and I'm here in London, with Sally Johnson, our CFO. We're joined virtually by members of our Executive Team: Tim Bozik, Rod Bristow, Gio Giovannelli, Albert Hitchcock and Bob Whelan. Tim, Rod, Gio and Bob will lead our North America Courseware, Global Online Learning, International and Global Assessment businesses respectively, and Albert is, of course, our CTO.
As you all have seen from the press release, there are a lot of great things happening across the company, some keen feature here directly from the colleagues who are making them happen when we get to the Q&A. Before Sally takes you through the financial results for the first half of the year in more detail, let me share with you what I think are the key headlines.
First, the impact of COVID-19 has had a major impact, especially on our Global Assessment and International businesses. The worldwide closure of schools and professional testing centers and a subsequent reopening due to limited capacity has hit first half sales and profits by around GBP260 million and GBP140 million, respectively. Things are improving. June was better than May, but we will, of course, all be living with considerable uncertainty for some time yet, and we are running the business on that basis.
Second, the lead indicators of digital take up are encouraging. For example, in the last three months, applications to our online university programs are up significantly year-on-year. Virtual School applications were up 61% in the first half of the year with retention rates also trending favorably. In US Higher Education Courseware, digital registrations, including eBooks, are up 5% year-to-date and up 10% since March, and in July, new digital course creations by faculty using Pearson platforms are also up. Internationally, My English Lab users have increased by over 40% year-on-year. In these unusual times, translating these leading indicators into future enrollments and revenues is more difficult to predict, but colleagues across Pearson are confident that we are seeing an accelerated shift to digital that will outlast the pandemic.
And third, the purpose, speed, grit and ingenuity, with which thousands of Pearson colleagues around the world are stepping up through the pandemic will ensure that all parts of the company are well placed to emerge from it in a stronger competitive position. For example, in recent weeks, we've won two new school assessment contracts in the US and are building a stronger pipeline of new opportunities. We delivered a more than eightfold increase in online proctored tests of Pearson VUE, just a 580,000 in the six months to June and a 33% increase in the use of our digital platform by psychologists using our clinical assessments. This will continue to enhance the competitive offerings of both businesses, well beyond the pandemic.
In International, we've hit the ground running in the Pearson Test of English in China, far faster than our competitors, doubling test bookings on the same month last year. Our track record in Egypt, online testing volumes, rising from around 5.9 million in the whole of last year to around 19.8 million in the first half of this is attracting the attention from other countries looking to follow their lead.
In North American Courseware, we've been scrapping for adoption deep into July, when normally the season would be well over by now, and we have now taken back most of the points or so of adoption share that we gave last year.
The support we're offering to colleges as they move to hybrid learning at scale, building services from our courseware or bundling services from our courseware and OPM businesses puts us ahead of the field and the pandemic has not distracted us for a moment from delivering on time and plan both the new fully digital experience for enrolling OPM students and on the Pearson Learning Platform roadmap that we shared with you in February. Both will bring major competitive advantages and plenty of new opportunities to grow.As Sally will explain, as well as making the discretionary cost savings vital to mitigate the impact of COVID-19, we're continuing to simply Pearson and make the company more efficient, so we ensure that the cost of running the company benchmark favorably against a wide range of peers. The actions we've taken have enabled us to emerge with our strong balance sheet intact and with enduring competitive strength. With ample liquidity and signs of a trading recovery, we are declaring an interim dividend in line with last year.
And, with that, I will hand over to Sally.
Sally Johnson -- Chief Financial Officer
Good morning. John has already taken you through the headlines, so let me walk you through each of the segments, starting with sales.
Global Online Learning was up 5% with strong growth in Virtual Schools and slight growth in OPM as expected. Assessments was down 27%, that's due to the closure of test centers and schools, which are now reopening. North America Courseware was down 14% due to the expected performance of US Higher Education Courseware, but also the impact of COVID, particularly in Canada where schools were closed. International was down 23%, given Global Test Center and school closures, which lasted longer than originally anticipated.
Turning to profit. Assessments and International profits were both down, which reflects the drop-through of COVID related trading pressures, including moderate write-offs, the stock obsolescence and bad debt. These trading pressures were partially mitigated by cost savings.
In Global Online Learning, the profit impact to sales growth was more than offset by the investments we've made as we target growing market. In Virtual Schools, we've invested in our teaching platform and curriculum development as well as enrollment and customer care support. In OPM, we're continuing to invest in the early stages of new programs. We implemented a new digitized enrollment platform, which have enabled us to reorganize part of the business which incurred severance costs and we saw the margin impact as discontinued programs came to an end.
North America Courseware profit was impacted by the sales, the time [Phonetic] drop-through, partially offset by restructuring savings. Enabling Functions' costs continue to achieve through restructuring as well as discretionary cost reductions given the current circumstances and our share in PRH was sold at the beginning of April. There is a small profit impact relating to Q1, given the business is held-for-sale at the year-end.
Here, you can see the usual profit bridge for the group as a whole. The profit impact from COVID trading pressures offset by cost mitigation was GBP140 million. There were expected profit impact from trading and inflation. Also, other operation factors are predominantly the online learning investments, I mentioned earlier, and we saw a reorganization savings of GBP35 million. Disposals relate to PRH and US K12.
So what can we expect in H2? Obviously, there are still a lot of uncertainties, both in terms of lockdown and how recent impact might impact future behavior, particularly in terms of university enrollments. But in many parts of our businesses, things are starting to return to a new normal. Test centers have largely reopened in a socially distant fashion, but with extended opening hours. Children are starting to return to school and universities are planning returns to campus or hybrid models.
As you can see from this slide, while April and May were very difficult, June start to see improvement. We are also continuing to see strong interest in online and digital learning. In our Virtual Schools, applications are up year-on-year by 61%. This should translate into enrollments in revenues for the 2021 school year. And although the reaction in OPM was a little slow, we're now seeing applications in ongoing programs right there too. In the US Higher Education Courseware, we're seeing growth in digital registrations and Inclusive Access deals, as well as lead indicators creation. This will partially offset the expected declines in print sales.
Now turning to each division. In H1, Global Online Learning saw 5% growth. In Virtual Schools, we worked hard to increase capacity in anticipation of good enrollment for the 2021 school year, given the application data I just mentioned. We're also seeing improved retention rates, all of which will benefit from the investments we've made in platform, curriculum and enrollment and customer care support.
Looking further ahead, we also see potential for new school districts and states to accept virtual schooling for the first time, opening up the chance for more parents to choose this school of education for their child. We also see potential and are starting to pursue international opportunities.
In OPM, we had always planned to slow revenue growth this year to pivot the model toward programs and partnerships with the best potential. We started to combine OPM partnerships with Digital Courseware relationships and we're also investing in platforms that help students to find the right pathway for them: A short course, a longer course, an online degree of certification over a mixture of a few combining in this way support lifelong learning and enables us to make the most of our spend and improve profitability.
Over the longer term, we expect Global Online Learning to grow mid- to high-single-digits with improved margin. This will be driven by three things; increased awareness and demand for virtual schools, growth in undergraduate enrollments and employability linked offerings, as well as a sustainable operating model in OPM.
Global Assessment had a difficult first half. Physical locations had to close, but we shifted operating wherever we could to online assessments and proctoring. And in clinical, we moved to our telepractice digital service. Many test centers across the world have now reopened with social distancing in place and longer opening hours to start to meet pent-up demand.
We expect to see recovery for Pearson VUE in the second half of the year, presuming any second waves are not extensive. Schools are also starting to reopen, but more slowly. So we anticipate student assessments and clinical will likely have a further modest impact in H2 in comparison with last year and looking further forward as testing with VUE in 2021, we have retained and won key new contracts. Over the long term, we expect low- to mid-single-digit growth in Global Assessment with stable margin as VUE continues to benefit from the desire to demonstrate employability and as our strong track record in winning share in Student Assessment continues.
John is going to discuss North American Courseware further, so I'll touch on the key points. First of all, the H1 US HE Courseware decline was as expected with the main COVID impact in Canada due to closed schools. We continue to expect further declines in print revenues and unbundling of packages, partly offset by growth in digital with the associated year in phasing impact of deferred revenue. But as this becomes an immaterial part of the business, our digital growth where we capture the secondary market.
Digital KPIs, as I outlined earlier, trending well, and we will use the shift to digital among other things to improve profitability. In International, the closure of test centers and schools, including language schools, affected Courseware sales and Pearson Test of English. International qualifications are canceled and our Brazilian English franchise business was impacted as premise is closed. There they quickly switched to the services.
In H2, we expect the international business to recover, presuming any further COVID lockdowns are not extensive. And looking further ahead, we see opportunities and employability, as well as Pearson Test of English, where we've now been approved to deliver testing for UK visas and immigration. Longer term, we expect this business to grow low- to mid-single-digit at current or moderately improved margins.
Enabling Functions' costs have reduced by 19% in H1, due to impact of our restructuring programs as well as discretionary savings. Our Enabling Functions' costs are those that support our entire business and each of our divisions in proportion to their size. They include enterprise technology, applications such as our ERP and CRM, finance, services from collecting cash due to forecasting, HR, everything from payroll to learning and development, and legal, as well as corporate functions.
We have an ongoing focus on cost competitiveness and with a further GBP50 million of savings in 2021, we will reach top quartile when benchmarked externally that every cost category with the exception of technology, which will be in line with the medium. Obviously, that continues to be much uncertainty, but for the business overall based on our current assessment of the trends experienced over the last few months, we are on track to deliver adjusted operating profit broadly consistent with market expectations, presuming any further COVID lockdowns are not extensive.
Cash flow was as expected given reduced profit, the higher operating cash outflow in H1 2020 compared to 2019 was lower due to lower profit, partially offset by reduced bonus payments. Working capital has been successfully controlled, but will obviously continue to be an area of focus given recent circumstances.
Net debt was GBP0.4 billion lower than the same time last year, mostly due to operating cash flow and the net proceeds from the PRH disposal. We continue to have a strong balance sheet and significant liquidity, which we enhanced with a very successful launch of our GBP350 million education bond in May.
Today, I am exactly three months into my role as CFO of Pearson. So now it feels like a good time to share some of my initial thoughts and key areas of focus. Firstly, as we transition further to a digital model, we need to hone our key KPIs, particularly lean -- lead indicators. We have shared today some KPIs, such as the applications for the first time and we'll look to enhance and refine these over time. Secondly, we will focus on improving divisional profitability, in particular in North America Courseware and OPM, which is where the biggest opportunities lie. As these models, business models, transition and alongside this I will ensure that we remain cost conscious and competitive, particularly in our Enabling Functions. And I'm also focused on our return on investment metrics. My ambition is to report externally what we track internally in time.
And, with that, I will hand over to John.
John Fallon -- Chief Executive Officer
Thanks, Sally. A couple of key things emerged from what Sally just took you through. Two of our biggest growth opportunities, Professional Certification and English Assessment and Services, whereas you heard temporarily diminished by the global lockdown. But as the lockdown eases, they are now recovering and they will continue to grow into the future.
At the same time, our other big growth opportunities, Virtual Schools and online universities, services that enable Blended or Hybrid Learning, Online Proctoring and Digital Assessment, pathways to employment, pearson.com has a learner-centric gateway, just got bigger and more immediate, and that's because COVID-19 is accelerating three big trends at the heart of our strategy:
Learners are taking more direct control of their own learning; the growth of hybrid education models, which combine the best of face to face and online learning; and the urgent need for people to continuously rescale and upscale to succeed and make progress in the changing way the world at work.
The Pearson Learning Platform is a key enabler of this digital transformation. It brings to market consumer grade products, great user experience that drive clear learning outcomes. In February, we identified a specific road map of missions that accelerate our ambition in higher education, as well as lifelong learning and employability, and you can see them on the slide here.
In the fall, we launched a plan, a direct-to-learner storefront offering on pearson.com that will enable learners to easily find, subscribe to and access their digital texts directly from us and that actually went live yesterday. We are launching feature improvements and additional titles to our Revel product that will enable educators to organize their classes and get insights about student progress with an improved learning experience. And we're also launching the new patient eText, a platform-based product with enhanced features and functionality, taking the traditional eBook to a new level.
So we're making good progress on our current road map and we're working on new missions, specifically targeted skill development and employability and transforming our OPM business from a white label managed services provider to an online learning pathways business. The Pearson Learning Platform you remember we talked in February drives digital growth in four ways: Share gains with differentiated experiences that improved learning outcomes; expanding the platform segment with innovative new products; establishing direct relationships with an evergreen supply of learners that we engage with over a lifetime of learning; and recapturing share from the secondary market.
Let me expand briefly on this last point. The biggest immediate opportunity for us in US Higher Education Courseware is recapturing share from our biggest competitor, which is the sale or rental of our own products in the secondary market. Last year, adoption of Pearson courses by faculty, generating demand for learners to consume around 33 million units of Pearson product. We only got paid for 12 million of those units with the rest of the demand been filled primarily by the secondary market with some, as you can see, non-consumption.
As we scale our digital and access models, providing better value to learners by focusing on outcomes, affordability and the experience, we will recapture a growing share of this lost value. We can see that this strategy is already gaining traction. Digital volumes are up 5% with a 26% increase in eBook rentals, which is an early indication of secondary recapture. As you can see on this slide, Inclusive Access revenues are up 28% year-to-date as importantly more new institutions are signing up all the time, which will help us in the years ahead.
The first year of our digital-first product strategy with frequent releases of content, features and updates no longer tied to an addition cycle with print only available through our own rental program is working. In the first half of this year, we increased total unit sales while shipping 700,000 fewer print products into the channel, diminishing future secondary supply. This print to digital shift will continue to hurt revenues in the second half of this year as we unbundle premium priced print and digital products for digital-only and as campus bookstores carried less and less physical inventory.
But the quicker we complete this transition to an overwhelmingly digital and subscription-based business, the sooner our Higher Ed Courseware revenues will first stabilize and then start to grow again as we take back the share of those 14 million units per year that we currently lose to the secondary market. That is a very big and interesting opportunity for Pearson that will play out over the next few years. And that's just one example for all the short-term challenges of the longer term value we are creating by focusing everything on ensuring that Pearson emerges as the winner in digital learning.
So, to recap. As anticipated back in April, we have seen significant disruption as a result of COVID-19, but we are encouraged by the improving trends from pick up of sales in June. Of course uncertainty remains, but we've taken swift action with all major parts of the company moving quickly to respond to the pandemic. This is enabling our business to recover as lockdown measures ease.
Longer term, the pandemic is accelerating a key trend. The future of learning will be digital and learners will care most about three things; experience, outcomes and affordability. Those are the three things that drive everything that Pearson, the world's digital learning company dose each day. And to repeat what I said earlier, the speed, grit, ingenuity and purpose with which thousands of Pearson colleagues around the world are stepping up through the pandemic will ensure that all parts of the company are well placed to emerge from it in a stronger competitive position and with more opportunities to grow in a sustainable and profitable way.
And, with that, we will be very happy to take your questions. I mentioned that we've got our colleagues joining us for the Q&A. They are all in different locations around the world. So we will be as slick as we can be in handling the questions, but I hope you'll bear with us if there is an opt [Phonetic] delay as we patch different colleagues in. But, Hugh, over to you for -- to take questions from our colleagues.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Okay. Our first question is over the line of Katherine Tait at Goldman Sachs. Please go ahead. Your line is now open.
Katherine Tait -- Goldman Sachs -- Analyst
Good morning, everyone, and thank you for taking the question. And my first question is on the growth in Inclusive Access, the sort of additional 94 institutions that you signed over the course of the first half, can you give us a sense in how much these institutions releasing testing materials before? And how you think about the shape of and [Technical Issues]? Do we see a negative mix impact from the lower pricing? How does that translate ultimately into higher revenue? And if you could just give us a bit of a sense of the moving parts, so those specifically that would be helpful?
Secondly, on the Online Proctoring, and can you help us understand the cost structure of Online Proctoring? How does it differ to, I guess, the sort of physical test centers and in your business? And how could we think about the evolution of that going forward?
And then finally, Sally you talked about focus on ROI. And can you talk about how you think about this with relation to organic versus -- an organic investment versus acquisitions like Smart Sparrow? What are the sort of -- and yeah, key considerations there? Thanks very much.
John Fallon -- Chief Executive Officer
Thanks, Katherine, and good morning to you as well. Let's go to Tim first. Tim, do you want to pick up on the sort of Inclusive Access of 94 institutions? [Technical Issues] What was their mix in use of Pearson products? And how does that -- how do we think about the impact on revenue over time?
Tim Bozik -- President, Global Product & North America Courseware
Sure. Thanks for the question, Katherine. We're very encouraged by the IA results year-to-date, as well as our pipeline. In terms of the product mix between current customers and new, it's a combination. John mentioned that we had a strong competitive adoption performance this spring. So some of the uptake in Inclusive Access volume as a result of new customers as well as conversion of current customers. From a product mix standpoint, we're also happy within increasing proportion of the product mix and eBooks, as well as our platform products, because the more that eBooks are fulfilled to the Inclusive Access channel and we -- do we have the customer benefits, but it's a big driver of secondary recapture.
John Fallon -- Chief Executive Officer
Okay. Thanks, Tim. Bob, do you want to pick up on obviously significant growth in Online Proctoring still in its relatively early stages, but how does the cost structure compare to our physical test centers? And how we're thinking about scaling it over time?
Bob Whelan -- President, Pearson Assessment
Thanks, John. I appreciate the question. Online Proctoring hit us really hard and fast and we were able to adapt quickly. The cost structure early on is very similar to brick and mortar, because you do have the remote proctors, you still have the human headcount cost, but you obviously don't have the rent of facilities' costs. We have a major investment going on to get our cost down, have more automation in that area to keep the cost down, but the take-up for Online Proctoring has surprised us. We're very happy with the success we've had and we are going to continue to be the best-in-class in that emerging area.
John Fallon -- Chief Executive Officer
Thanks, Bob. And then, Sally, do you want to -- how we think about return on investment between sort of organic and inorganic spend?
Sally Johnson -- Chief Financial Officer
Yes. So one of the things I've been looking at in the early months is return on investment, particularly looking across each of our businesses and divisions to make sure that we have clear metrics in place with focus on the return on the cash investment that we're making. So whether it's an OPM business, where the investment tends to be more from a P&L perspective, or whether it's one of our more traditional businesses, where you capitalize that investments, making sure that we're balancing both risk and reward. Obviously, over recent times that's an organic focus that we've had. You're quite right. We've had some small investments, more recently Smart Sparrow, that enhances to fit that inorganic investment that we're making internally with things like the Pearson Learning Platform and as well as the Lumerit business we have. So basically a return on cash flow, which is equal whether we're looking at something from an external acquisition point of view, whether it's from an internal organic point of view.
John Fallon -- Chief Executive Officer
Okay. Thanks, Katherine. Hugh, where we're going to go next?
Operator
Okay. The next question is over the line of Matthew Walker at Credit Suisse. Please go ahead, Matthew. Your line is now open.
Matthew Walker -- Credit Suisse -- Analyst
Thank you, and good morning. First of all, obviously, it's nice to hear that you're recapturing some share. I think you said you've recaptured most of the points of share that you lost. Can you just go into more detail about how you've done that and what incentives you may have given in order to do that? And we noticed on the Cengage call, they've said, people have been less focused on unlimited, because of the pandemic.
The second question is really, I don't know if Sidney is on the line, it's really about the new CEO. And the question is really how much freedom is the new CEO going to be given on digital pricing? And if they decide that they want to rebase digital pricing, are they going to be allowed to do that, or is the Board going to basically appoint someone who agreed with them and doesn't want to rebase digital pricing? Thank you.
John Fallon -- Chief Executive Officer
Okay. On the first question, Tim, do you want to pick up? I mean, I think as I signaled, Matthew, I think the adoption season paused in March, late March, early April, because of the pandemic, but then it has picked up again with vigor and I think we are very pleased with the way we performed competitively. Tim has done a great job of leading that. So, Tim, do you want to talk a little bit more about the work we've been doing?
Tim Bozik -- President, Global Product & North America Courseware
Sure. Thanks, Matthew, for sort of picking that up. The sales force -- the incentives for the adoption recapture were largely around the quality of the relationships that our sales force has with the customers, as well as product market fit. They got off, as John mentioned, to a strong start in January. They supported customers significantly in the sudden shift to digital and online learning and they have resumed their sales activity more quickly than we had anticipated and extended into the summer, as John indicated, all of which added up to the strong competitive performance we mentioned. It's also the sales force that entered particularly the spring stable from a relationship standpoint. We had -- we were through the changes we had made and making greater utilization of our one CRM tool, which provides the kind of visibility and confidence about our adoption performance.
John Fallon -- Chief Executive Officer
Okay. Thanks, Tim. And on your second question, Matthew. Obviously this is our interim's call. So as you would expect, you have the CEO, the CFO, and all of the senior management team. You have seen in the press release this morning that Sidney has reported that the CEO succession is in advanced stage, that's obviously a matter for the Chairman and the Nominations Committee, that's not a matter for me. My job and the job of everybody on this call is to ensure that we do the best possible job we can of meeting the needs of educators and learners through the pandemic. We are rising to the challenge. I'm confident we're going to emerge from it as a stronger, better business. Our job is to -- or my job is to transition to the new CEO with as much wind in our sales as we possibly can and that's what we're doing. And then I would expect that the CEO will pursue the strategy that he or she thinks is right for the future of the company and my job is to make sure that they are in the best possible position to do that.
Matthew Walker -- Credit Suisse -- Analyst
Okay. Thanks, John.
Operator
Okay. So we now go to the line of Adam Berlin at UBS. Please go ahead, Adam. Your line is now open.
Adam Berlin -- UBS -- Analyst
Hi. Good morning, everyone, and thanks for taking the questions. And the first thing I just wanted to get clarity on was compared to the original kind of EBIT bridge that you gave at the full year results and now updated for the first half, how should we think about the second half? Is there anything that's changed and in terms of any of the specific drivers that may have changed since? And you gave the guidance in February and specifically on the trading, are we still thinking that's the GBP20 million impact as you first described?
And then what are the other COVID impacts we could see? And if you could help us think through the side, that's in your best, but I know you've mentioned there is a bit more to come in Student Assessment, but -- and where else could we see negative trading and in the second half to get to what your guidances today, which we still think consensus numbers are achievable? And just to understand the thinking there?
And specifically on that, when you talk about Global Assessment improving in the second half, are you saying that you expect Global Assessment taking Pearson VUE to grow year-on-year in the second half or just declined by less in the second half?
And the third kind of volume is within online learning. You said there was about GBP15 million of investments in the first half. Is there going to be more investment in the second half as well in online learning? It's kind of all in the same theme, but just then if you can answer those two supplemental questions specifically, that'd be very helpful.
John Fallon -- Chief Executive Officer
So, Sally, could you sort of pick up on the bridge and sort of how we're thinking about the second half of the year. And then, Bob, maybe you could then just give a little bit of color about how, sort of, how we are adjusting to you use the phrase of the day the new normal in how we're running our Global Assessment businesses? So Sally maybe you could pick up on the bridge, and then Bob you could just talk a little bit more operationally about how we're adjusting to the world.
Sally Johnson -- Chief Financial Officer
Yes. So, first of all, picking up on the bridge in the first half, you'll see that putting the COVID impact of GBP140 million to one side, all the other elements are pretty much what we would all have expected. So turning to H2, the key elements are picking up of assessments. First of all, you've got VUE recovery in the second half of the year, so I think you can expect to see VUE exiting the year back on the trajectory that we would always -- all have expected at the beginning of the year into 2021.
Then for school assessments and clinical, which are more tied to schools, which are going back more slowly, a moderate impact if you've picked up compared to H2. Then for our international businesses, we expect to see recovery in a similar manner, so that the IA describes the VUE. And then, our online business, so we've shared with you the applications data for our Virtual Schools business and that 60% increase in the first part of that the year, that should turn into enrollments in Q3, which will drive revenues in the second half of the year and then also into 2021.
And then for North American Courseware, we expect the similar trends that we had flagged at the beginning of the year. So a decline in print on bundling offset by digital growth with an impact from enrollments given the current circumstances. And then from an online investment point of view, the nature of these businesses means that that investment tends to be in the first half of the year, so you see more of an impact in the first half.
John Fallon -- Chief Executive Officer
Okay. Thanks, Sally. Bob, do you just want to give a bit of color to, sort of, you know, as we got our network going again around the world, sort of how things are operating, how we're adjusting to the new world?
Bob Whelan -- President, Pearson Assessment
Sure. Thanks for the question. We are opened in most places now. We have limited capacity for social distancing, but we are compensating that by staying open longer hours. Most of our testing centers in the US are open from 6:00 AM to midnight, in the UK from 9 -- 8 in the morning to about 8 at night, and we are back on track. We are excited that the Online Proctoring has taken a good bit of volume out of the PPCs, or Pearson Professional Centers, which reduces some of the stress on those. So we think that we will emerge in the third and fourth quarter with the trajectory of getting back to the growth that we expected at the beginning of the year.
John Fallon -- Chief Executive Officer
Okay. Thanks. Thanks, Bob; and thanks, Adam. Hugh, back to you.
Operator
Thank you. So, we now go to the line of Tom Singlehurst at Citi. Please go ahead. Your line is now open.
Tom Singlehurst -- Citi -- Analyst
Hi. It's Tom here from Citigroup. Thanks for taking the questions. And first one actually on US Higher Education Courseware. And I have noticed there were some complaints from libraries that say you, Cengage, McGraw-Hill are not making physical versions of your books available for them to loan out to students, which is obviously an encouraging sign that you're focused on, sort of, clubbing down on the secondary market. And I just wondering, one, whether you'll be able to hold the line on that? And whether there is any sort of prisoner's dilemma type impact that we should worry about?
And then, second, whether there's any sort of extraordinary provisions the libraries could pull to try and sort of argue that they are justified and sort of breaching copyright and lending them out under extraordinary measures anyway. And so that was the first question.
And then the second one on Virtual Schools. And obviously applications are up, which is great. You talk a bit more about -- sort of more schools coming online, I just wondering whether you could sort of contextualize that and three new schools in the fall, what increase in total available spaces to that, if you --? And then just more broadly as we run into next year, I mean is this a process that you can accelerate or is it just a sort of slow burn in terms of expanding available places? Thank you very much.
John Fallon -- Chief Executive Officer
Okay. Thanks, Tom. We'll come to Rod in a minute to talk about how we're building capacity in our Virtual Schools, but first of all, Tim, do you want to pick up on the question around rental or loaning our eBooks through libraries and pick up on that point?
Tim Bozik -- President, Global Product & North America Courseware
Sure. So libraries play an important role in the educational access system, primarily for research purposes. So specifically in terms of product availability from a print perspective, as a reminder, while our print products in our rental program are available in print-only, it's a print own model where at the end of the rental period the consumer can decide if they want to retain ownership. From a library perspective, I'm sure we can evolve a policy that could enable libraries to participate in print availability. But, again, primarily students access their content in a number of different models that in addition to libraries.
John Fallon -- Chief Executive Officer
Yes. And just to add on that, Tom, I mean, I think the fact that we've seen a 25% increase in volume of eBook rentals in the first half of the year basically says to you that we put together a compelling model, it's priced very competitively against the secondary market. So I think we are providing very good value to students in the eBook, in the eBook market, and I think we expect that growth to continue in the second half.
And, Rod, do you want to pick up on the Virtual Schools point. I mean, I know in addition to opening new schools we're also working hard and have been for some months now to expand capacity in our existing schools, so we can meet as much of the huge increase in demand that we're seeing as we possibly can. So do you want to say a little bit more about that?
Rod Bristow -- President, Pearson UK & Global Online Learning
Yeah. Thanks, John; and thanks, Tom, for the question. And absolutely, we are seeing -- one of the biggest constraints to growth in the Virtual School sector until now has less been about capacity and more about category awareness. So one of the things that the COVID-19 crisis has done is, of course, significantly increased the awareness of virtual schooling as an available option, which is driving very strong and accelerating demand.
In terms of the capacity itself, there are currently 32 states in the United States where it is possible to operate Virtual Schools. We, in Pearson, are already in 29 of them and we are reasonably confident in the next year or so of getting into at least another two of them. And as far as capacity is concerned, within each of the schools we're actually feeling pretty good about our capacity right now to take the level of growth that we are seeing, very significant growth, but we are confident today in the capacity that we've got. So yes, so feeling good on the capacity front.
John Fallon -- Chief Executive Officer
Yeah. And it's probably just we're saying -- I mean, we are not expecting the 60% increase in applications. I don't think you should assume, it's going to translate into a 60% growth in enrollments, but I think you should expect it to translate into very significant growth in enrollments and much higher than we would have seen in recent years. Okay. Hugh, where should we go next?
Operator
Okay. So we now go to the line of Sami Kassab of Exane BNP Paribas. Please go ahead, Sami. Your line is now open.
Sami Kassab -- Exane BNP Paribas -- Analyst
Thank you very much, Hugh; and good morning, everyone. I have three questions please. The first one is, just to follow on what Tom asked. How many of your Connections Academy have enrollment caps? And how far are you from reaching these enrollment caps, please?
Secondly, how do you assess the impact of the regulatory changes on developmental education? Are you through with the headwind there or do you think that changes in developmental math and reading will remain a drag into H2 and next year?
And, lastly, historically your Higher Ed Courseware revenue forecast implied 1% to 2% decline in enrollments. Is that still your view for full 2020? Thank you.
John Fallon -- Chief Executive Officer
Okay. Thanks, Sami. Rod, do you want to pick up on the first point, what enrollment caps exist and what sort of headroom does that give us in terms of meeting increased demand for Virtual Schools? And then we'll -- then I'll come on to Tim for the next two questions.
Rod Bristow -- President, Pearson UK & Global Online Learning
Yeah. So about half -- about 21 of the Connections Academies have got enrollment caps. But even within those, we're very confident about the caps that are in place, gives us capacity to grow with the exception of a small number, which we are currently in conversation. We said there are small number that have caps that could limit growth, but for the most part we are -- we feel that we are in a good place.
John Fallon -- Chief Executive Officer
Okay. Thanks, Rod. And then, Tim do you want to pick up on Sami's other points. Are we -- is there still more room to go in terms of the impact of regulatory changes in developmental education? Are we there now? And we were working on the basis of a 1% to 2% decline in college enrollments at the start of the year. What's our best sense of now where it's likely to end up and why?
Tim Bozik -- President, Global Product & North America Courseware
Sure. Thanks, Sami. So we think we're considerably through the impact on developmental education, but not completely. And as a reminder, developmental education demand is driven by the number of students who need it and how it served and how it served has continued to integrate developmental education, now their college courses were eliminated in some states, sort of dedicated courses. So majority to -- not entirely to that, Sami.
On the enrollment outlook, as John said, we started the year with an outlook of low-single-digit enrollment declines consistent with recent years. We now have a view of high-single-digit declines and that's a function -- let me to step back first to acknowledge, no one knows. So we have a working hypothesis on this. But we think it'll be high-single-digit, because we'll see some pressures from expected lower first year starts and some students will choose to defer. We expect lower international enrollments for policy reasons, but as a reminder international enrollments are 5% of the total US student enrollment and 2.5% of undergraduate. We think that's factored into the high-single-digit. And we also expect some redistribution. Some students would choose to stay closer to the home, and we may see a possible increase in adult learners seeking upskilling or reskilling. And how they acquire those skills may change, short courses, those areas we're also investing in and offering to our online learning and higher ed business.
John Fallon -- Chief Executive Officer
Okay. Thanks, Tim. And I think the other point just -- I mean, I think, Tim talked about early, Sami, is, whatever level enrollments end up being, we are certainly going to see an accelerated shift from analog to digital within it, partly as a direct results of the actions that we're taking, but I think also with the accelerated shift to hybrid learning, we're seeing greater and deeper use of our digital products, both in terms of platform-based products and eBooks as well.
Okay. Thanks, Tim. Thanks, Sami. Hugh, where we're going next?
Operator
Okay. We now go to Patrick Wellington at Morgan Stanley. Please go ahead.
Patrick Wellington -- Morgan Stanley -- Analyst
Yes, good morning. Two questions. First one for Sally. You talked about the Enabling costs and how they are fixed at the pretty optimum levels in most areas. So can you give us a likely absolute number run rate for those -- that level of costs, because you've clearly pitched at the optimum rates [Phonetic]?
And then, secondly, just going back to Virtual Schools. Can you give us an idea -- you talked a little bit about operational gearing in this business. So if we get a substantial increase in enrollment, obviously you have the capacity as you are seeing in place. So what's the drop-through like of incremental revenues to the bottom line in the Virtual Schools business?
John Fallon -- Chief Executive Officer
Okay. Thanks, Patrick. I think Sally will pick up both of those. And I'm sure to make the point on Enabling costs, we'd never say we're optimum, because there's always learning, always improving, always scope to do better, but Sally, do you want to pick up both on Enabling costs and what the sort of gearing and sort of margin characteristics of our Virtual Schools businesses are?
Sally Johnson -- Chief Financial Officer
Sure. So on Enabling Functions costs, we've had a period of reorganization that's cost us to a really good place in these costs, and we do benchmark well, but I want to remain cost competitive and the benchmarks will move on. And so, will we. So we will make sure that all of the systems that we put in, all of the processes we've put in continue to keep those costs on a downward. To that trend also that we make the most out of those investments. So things like CRM system that we put in, that's not just about making our sales team's benchmark well from a cost perspective, it's also about driving revenues with the data that we see as well. So I'm very, very focused on cost competitiveness in Enabling Functions.
In terms of Virtual Schools, that business from a profitability perspective, it has decent profitability, already compares to the rest of the group and the operational gearing of that group would be in line with most online businesses, so you're looking at sort of 40% type margin.
John Fallon -- Chief Executive Officer
Okay.
Patrick Wellington -- Morgan Stanley -- Analyst
Well, hang on a second. I didn't actually get an answer to either of those questions. I mean, if you all -- can you talk about the Enabling Functions as an absolute number? I mean, I think you have reached an optimum level in terms of the absolute cost, because a lot of the things you talk about don't have a relationship with sales; the ERP platform, the corporate functions. So, do you look at those Enabling costs in proportion to the sales of the group or is that an absolute number, which last year was GBP449 million, which you can make marginal adjustments to, you've got your GBP50 million next year, but I'm just trying to see what drives those costs? Because they don't -- doesn't seem to me that they move around with the level of sales and you did talk about having already largely optimized the level of costs.
And then on your 40% margin in Virtual Schools, so are you -- is that a 40% total margin or is that 40% drop-through of incremental revenue? Because actually that drop-through should surely be much higher and you've got basically a fixed costs in Virtual Schools and you're getting more student revenue across it, so what does that 40% mean?
Sally Johnson -- Chief Financial Officer
So on the Enabling Functions costs, you're right, GBP450 million last year, which is about 11.6%. I'm wanting to drive back percentage down, the GBP50 million will help with that next year, but that's not the end of it. I want to continue to drive it down. In terms of variable to sales, you're right, the type of costs that are in there on variable to sales, that's an element of discretionary costs. So I can continue to drive down and make the most of, but it's not -- I wouldn't call them cost of sales type costs.
And in terms of the schools margin, the profile is not simple. If you've got an early days school, you're recruiting teachers, you've got to maximize class sizes, and so that 40% I'm giving you was kind of a broad brush over a period of time within a relatively small level of central costs given the type of businesses.
Rod Bristow -- President, Pearson UK & Global Online Learning
And just to build on that last point, Patrick. Just -- I mean, if you think in the Virtual Schools, it's really the cost come in three buckets, you've got your sort of enrollment marketing, so the cost have actually sort of generating leads and converting those leads into enrollments. Clearly at a time like this, your cost of acquisition goes down, because you've got a lot more level of interest. Secondly, you've got your technology platform cost, which we all are sort of investing in, which obviously do have leverage and scale the more you go through them. But to Sally's point, this is virtual schooling. So this is still schooling that involves teachers, who are teaching virtually rather than face-to-face. So by definition, if you've got more students, you need more teachers. So it's a bit of a hybrid model rather than thinking of it as a pure sort of online platform play.
John Fallon -- Chief Executive Officer
Okay. Thank you, Patrick. Where should we go next?
Operator
Okay. Well, before going to Nick Dempsey at Barclays [Operator Instructions]. And Nick, over to you.
Nick Dempsey -- Barclays -- Analyst
Yes. Good morning, guys. I've got [Technical Issues] so I just to pick up on the points of adults perhaps choosing short courses for upskilling rather than perhaps a two-year community college. Now to what extent do those shorter courses typically use textbooks or do the company's offering them create their own content, some kind of note that goes alongside it?
Second question, you're talking about operating profit being broadly consistent with the GBP330 odd million of boomer [Phonetic] consensus. To what extent either side of that should we be thinking? And what are the major variables? Is that GBP330 million going to linked to a high-single-digit assumption of enrollment. Yes, how do we define broadly consistent?
And last question. As you would take share back from the secondary market, how do you expect the secondary market to fund back? There is a hell of a lot of print textbooks out there in the secondary market, when the rental players just start to lower their prices to make sure that they're clearly the cheapest option out there, otherwise they are stuck with a lot of books and then won't students just opt for the cheapest option again?
John Fallon -- Chief Executive Officer
Okay. Thanks, Nick. Well, I'll, maybe, pick up on the third point in a minute, but Rod do you want to pick up on the first point, because clearly the shift to sort of short courses and offering it as part of a sort of a broader blended offering is important and I know that you and Tim have been working very closely together as I mentioned in the opening remarks in terms of sort of bundling and I know we're also got some interesting initiatives where we're actually combining our Courseware with our services with some of our biggest enterprise partners. So do you want to talk a little bit about that? And then Sally, do you want to talk a little more about some of the underlying assumptions between how we are expecting things to turn out in the second half of the year? So Rod, do you want to pick up on the short courses point?
Rod Bristow -- President, Pearson UK & Global Online Learning
Absolutely yes, John. Thanks for the question, Nick. As John was saying earlier, as learners take more control of their own learning, we are seeing a clearer and growing demand to shorter courses connected to employment and this of course has been accelerated by what's happened with COVID-19. Back in the UK, in response to a government request we created something called UK Learns, which is populated with about 500 or so short -- accredited short courses that we made available to the millions of furloughed workers.
UK Learns is really the precursor to something we've been working on now for a while, Pearson Pathways, which contains a sophisticated engine, which matches consumer need to the right pathway and ultimately to the right course. That actually is going to help us not just drive growth, but it will also help drive efficiency in the enrollment processes that we have within our core OPM business and indeed we're advising our OPM partners to participate in the platform.
To your question about the degree to which content that we may have produced is relevant to those courses, it certainly is -- there are a number of things we're doing that Tim might take up a little bit on some of the IT, IT professional courses that we're producing, we're producing shorter BTEC courses of our own. In fact, we have based on our own Courseware range of courses that gives students credit for part of their degree program that are based on Pearson textbooks and these also a short courses that we're making available to students. So there is a synergy between the two, but this is a growing opportunity.
John Fallon -- Chief Executive Officer
Okay. Thanks, Rod. Sally, do you want to pick up on the point around what are our broad assumptions for the second half of the year, acknowledging the high degree of uncertainty that there is?
Sally Johnson -- Chief Financial Officer
Yes, sure. Our current assessment, as I said, is that, we'll be broadly in line with those market expectations, which you've pointed out are on boomer [Phonetic]. In terms of a range around that, obviously we give a range around guidance and did so at the beginning of the year. So I mean that would be a decent range to use maybe given the uncertain circumstances a little wider than that. And to your question about the enrollments and whether those are in line with that then, yes, that's one of the assumptions that we've used in giving that feedback.
John Fallon -- Chief Executive Officer
Okay. And then on your third point around the secondary market, I'll ask Tim to -- in a minute just to talk a little bit more about some of the new features and functionality that we're bringing to bear with the next generation of eText and how that will further enhance the eText offering.
But just to sort of a pick up on your point, Nick. First of all, I mean if you think even three years ago, we still had something like 7 million print units going into the secondary market, it's now dramatically lower than that. So, over time, we are starving the secondary unit. And while you're right to say that there is a lot of secondary units out there, each year they get older and they get less out of date, and we are starving into new up-to-date products. So that is having an impact.
And, secondly, for the first time last year, the student survey showed that given the choice, the majority of students if the price is right preferred an eText to a print rental offer. So the sort of the consumer demand is going in our way and then we are playing a very active role in shaping the dynamic of the market. But then third, Tim, we're actually making the eText a very different and much more attractive proposition, I don't know if you want to talk a little bit more about that.
Tim Bozik -- President, Global Product & North America Courseware
Sure, John. So, Nick, thanks for the question and agree the the consumer choices are based on utility and price. And as John mentioned, we're seeing these students demonstrate digital preferences are sort of rise of the secular digital preference we're seeing. On the utility side, as we shift more of our product not only to digital but through our Pearson eText, we're able to add features that students value, be that search, omnichannel, offline, online, integrated study tools within them and regular updates to content and functionality. So we think those consumer preferences and our ability to meet them rapidly through the Pearson Learning Platform put us in a strong position for secondary recapture.
Nick Dempsey -- Barclays -- Analyst
Can I just quickly go back -- oh sorry, go ahead.
John Fallon -- Chief Executive Officer
Well, I just going to say, Nick, one of -- and just another example, audio. This generation of students love in able to listen while they are commuting or traveling or working out at the gym or in the coffee shoo or whatever, you can't listen to a physical textbook, you can listen to eText. So just another example of how as we increased features and functionality, we make our offerings much more attractive compared to secondary. Sorry, Nick, I [Speech Overlap]
Nick Dempsey -- Barclays -- Analyst
Yes. Sorry, no. So just to get back to the first question. I mean, I heard some interesting stuff you're doing with short courses. I guess my question was really, if there is a mix shift away from two-year community colleges for adult learners coming back, if they're out of a job, two short courses, is that a negative effect on your ability to sell content, because those short courses don't use your content, whereas back in the last recession two-year community colleges absolutely did?
John Fallon -- Chief Executive Officer
Yeah. So, I think, I mean, Tim, you may want to pick up on this, but I think a lot of the short courses provision we're seeing has been offered by four-year public universities, it's been offered by the full profit sector, short courses have been offered by sort of community colleges. So I don't think you should assume that just because as you shift to short courses we're not seeing some of our established partners and providers meet that demand. But, Tim, do you want to add to that?
Tim Bozik -- President, Global Product & North America Courseware
Sure. Thanks, Nick. So community colleges in the US serve two purposes. One is that the first two-years of a general education where students want to transfer in and the second is really they've all been in the -- provided the role of employment-based job-driven education. Short courses to some extent are just an alternative form of that and increasingly a digital form of that. And to Rod's point, as more teaching turns to online and digital, they still have content and the trends of integrated content and drawing on course digital course for a content as part of short courses is part of what exist now and we believe we will continue.
John Fallon -- Chief Executive Officer
Okay.
Nick Dempsey -- Barclays -- Analyst
Great. Thank you.
John Fallon -- Chief Executive Officer
Thanks, Nick. Hugh, back to you.
Operator
Okay. I'm afraid we've only got time for one more question. So the final question for today is over the line of Sarah Simon at Berenberg. So, please go ahead.
Sarah Simon -- Berenberg -- Analyst
Yes, hi. I've just got a couple of small questions. Firstly, can you give us an idea of how much discretionary saving you managed to get out in the first half to offset some of the COVID impact? And, secondly, within -- can you give us an idea within Higher Education Courseware, what the split is in the first half between analog and digital? And within digital, what is Inclusive Access and what is eBooks? Thanks.
John Fallon -- Chief Executive Officer
Okay. Sally, do you want to pick up on the discretionary savings point? And then maybe between you and Tim, you can help answer that -- give a bit of a color and a bit of flavor around the sort of digital/analog mix?
Sally Johnson -- Chief Financial Officer
Yes. So for discretionary savings, once COVID lock is down, we have about GBP10 million of savings each month coming through and then also there's obviously an impact in terms of performance bonuses in the first half as well.
John Fallon -- Chief Executive Officer
Okay. Then, Tim, do you want to answer the sort of digital/analog mix shaping up and how has that been sort of influenced by the growth in Inclusive Access? Tim, are you there?
Tim Bozik -- President, Global Product & North America Courseware
Sorry, I was on mute. Thanks, Sarah. The -- in terms of the analog/digital mix, as John and Sally have mentioned, we're seeing both digital volumes and digital revenue increases and we're seeing accelerated print declines. The first half of the year is circa 40% of the full-year, but we expect those trends to continue into the second half. It's too early to tell how that might completely turn out.
In terms of the how IA factors into that, the -- as we mentioned, we have -- we're seeing a 28% increase year-to-date, we're seeing a strong pipeline for fall and the question that Katherine posed earlier, we're seeing the product mix within that support and -- as an increasing portion of eBooks as well as platform products in both retained and new customers. So while we don't know how the second year will turn out, we do expect growth in digital and growth in direct channels, all of which set us up for a long-term more digital and more sustainable business poised for both the kind of secondary growth that John described, as well as the adoption share growth fueled by the Pearson Learning Platform.
John Fallon -- Chief Executive Officer
Okay. Thanks, Tim. Thanks -- Sorry, Sarah, go ahead.
Sarah Simon -- Berenberg -- Analyst
Yes. I was just going to say, can you give us any idea of how -- what proportion of total revenue, total Courseware revenue in H1 was from Inclusive Access, not the growth just the percent in total?
John Fallon -- Chief Executive Officer
Tim, could you help with that?
Tim Bozik -- President, Global Product & North America Courseware
I'd have to do a quick look up, so that may be something we have to get back.
John Fallon -- Chief Executive Officer
Right, we will. Sarah, we'll follow up offline, because I mean clearly remember that there is a -- Sarah, actually we're waiting to the second half, but we'll pick up and follow-up on that offline. Okay.
Sarah Simon -- Berenberg -- Analyst
Thanks.
John Fallon -- Chief Executive Officer
Thanks, Sarah. Thanks, Tim. Thanks, everybody, for joining us this morning. I think that we -- I don't know what your experiences in lockdown has been, but the fact that we went 65 minutes before somebody said sorry I was on mute, I think it was pretty good going. Thanks as ever for your interest in the company. Joa, Anjali and Teddy are all with us here, and if you have any follow-up questions that you want to ask, please let us know. And I shall say thanks for your interest, and look forward to catching up again soon. Cheers now. Bye.
Operator
[Operator Closing Remarks]
Duration: 67 minutes
Call participants:
John Fallon -- Chief Executive Officer
Sally Johnson -- Chief Financial Officer
Tim Bozik -- President, Global Product & North America Courseware
Bob Whelan -- President, Pearson Assessment
Rod Bristow -- President, Pearson UK & Global Online Learning
Katherine Tait -- Goldman Sachs -- Analyst
Matthew Walker -- Credit Suisse -- Analyst
Adam Berlin -- UBS -- Analyst
Tom Singlehurst -- Citi -- Analyst
Sami Kassab -- Exane BNP Paribas -- Analyst
Patrick Wellington -- Morgan Stanley -- Analyst
Nick Dempsey -- Barclays -- Analyst
Sarah Simon -- Berenberg -- Analyst
