February 24, 2017 / 7:41 AM / in 10 months

UPDATE 3-Pearson to cut costs further, sell assets after $3.3 bln lose

* 2016 results slightly better than expected

* Shares up 5 percent (Adds comment by CEO, share price reaction, background)

By Kate Holton

LONDON, Feb 24 (Reuters) - Pearson earned some respite from the turmoil weighing on its business on Friday, the education services giant saying trading had not deteriorated further and that its balance sheet was in better shape than feared, despite a big headline loss.

The company, which has issued five profit warnings in four years after students in the United States started renting rather than buying text books, reported underlying operating profits, debt and cash flow all slightly better than expected.

However the scale of the long-term challenge as more of its services also go online was reflected in a 2.6 billion-pound ($3.26 billion) pretax loss for 2016 that stemmed from a writedown on the value of the North American business.

“We face another couple of years of difficult, painful change but we’re very optimistic about the five-year outlook for this business,” Chief Executive John Fallon said.

Pearson’s share price was up 6 percent at 685 pence by 1145 GMT, still well below the price level of 808p at which the shares were trading before a profit warning sent the shares plunging 30 percent on Jan. 18.

Analysts at Citi said the results should provide some relief to a company that had been a prime target for short sellers. The group also got a boost from one of its top five shareholders, Lindsell Train, which said ahead of the announcement that it would stick with the firm while it converts to a digital future.

“We are keen to maintain and add to our holding in the company to take advantage of the digital transformation of educational coursework,” it said.

“We will do so more aggressively when we have more confidence that cash flows are building value and balance sheet strength to support these changes is no longer in any doubt.”

Employing 35,000 people, Pearson provides everything from textbooks to school testing, college courses and online degrees across the United States, its biggest market, Britain, South Africa, Brazil, China and elsewhere.

In 2015 the group sold the Financial Times and its stake in the Economist to focus on the once stable business of education, but in the last year it has been hit by the same shift to the Internet that shook up recorded music and newspapers and has now caught up with the classroom.

The 173-year-old firm has announced plans to move more aggressively into ebooks by slashing prices and will launch a print rental programme.

Last month it put a price on the market change, cutting its 2017 profit forecast, scrapping its 2018 target and warning it would cut the dividend in 2017, the first cut in more than 20 years. The payout for 2016 was maintained at 52 pence, as promised last month.

In its full-year results published on Friday the company said adjusted operating profit fell 21 percent to 635 million pounds, slightly ahead of January’s target, due to tight cost controls.

Net debt increased to 1.1 billion pounds, from 654 million pounds the year before, but its operating cash flow jumped.

The group declined to put a price on another cost saving plan - to the disappointment of some analysts - but said it would align its costs with the size of its markets in future.

Pearson also said it planned to sell its English language learning business GEDU and was looking for a partner to invest in its Wall Street English (WSE) unit. It has already announced a plan to sell its 47 percent stake in the Penguin Random House joint venture. ($1 = 0.7969 pounds) (Reporting by Kate Holton; Editing by Paul Sandle, Greg Mahlich)

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