Speaking at last week's UBS media conference, executives from three of the nation's largest education publishers said they expect growth in both the elhi and college segments to be modest at best for 2003 and 2004, but all projected stronger growth in 2005 and beyond.

Terry McGraw, chairman of the McGraw-Hill Companies, told analysts that the company is projecting that the elhi market could decline by as much as 5% in 2004, while growth in the higher education market is expected to increase 2% to 3%. Mark Armour, finance director for Reed Elsevier, parent company of Harcourt, said 2004 should be the "low point" in what has been a three-year trough in the elhi market. Tight state budgets and fewer adoption opportunities were cited by McGraw and Armour for the weak outlook for the elhi segment next year.

Higher education sales were up 2% in the U.S. at Thomson Corp. in the first nine months of 2003, and company president Dick Harrington said he does not expect significant growth in the college market for either 2003 or 2004. Harrington said Thomson's sales to two-year community colleges have been down this year, which he attributed to higher tuitions. Thomson is projecting market growth in 2005 to improve to the 4% to 6% range. MHC's McGraw cited declines in course enrollment for the lower-than-expected increase in college sales this year and said that enrollment trend could persist into 2004. MHC's entire education group will have flat to modest gains in 2004, McGraw said, with the gains in the higher education, professional and international segment offsetting softness in the school segment. McGraw added that he is looking for education sales to "rebound sharply" in 2005.

Armour said 2004 "won't be a rip-roaring year" for the elhi segment, noting that Reed is expecting sales at Harcourt to be flat next year before recovering in 2005 as more state adoptions come on line. Armour said Reed expects its LexisNexis and Elsevier groups "to pull the load" in terms of growth again in 2004 much as they have in 2003. In addition to the sluggish performance at Harcourt, Reed is not budgeting for any real recovery at Reed Business Information (which includes PW) next year.

All three executives pointed to some bright spots in their educational businesses and were generally optimistic about the prospects for their entire companies. Both McGraw and Armour said that because of the No Child Left Behind Act and its demand for more student accountability, testing has been a solid area. Sales at CTB/McGraw-Hill are up in 2003, and more growth is expected next year. Armour said that although Harcourt's testing business was hurt in 2003 by the loss of a state contract in California, the company has signed new contracts in other states that should benefit the company in 2004.

High Hopes For E-Publishing

Electronic publishing was another area that the three executives said has been doing well and should continue to grow at a rapid clip. Both Armour and Harrington said that online sales in their respective legal businesses have been growing at a faster pace than print. In fact, electronic sales throughout Thomson have grown at a 16% compound annual growth rate over the last five years, Harrington said. He noted that electronic publishing now accounts for 33% of Thomson Learning's sales. Thomson's scientific and health group has also seen strong online growth, and Harrington cited Thomson's success in developing products that can be downloaded to doctors' PDAs. MHC has also had success producing medical materials that are used by doctors through their PDAs.

MHC, Reed and Thomson have all used acquisitions to help fuel their growth, and while all three said they continue to look for new opportunities, they shied away from promising any major acquisitions. Harrington said Thomson will focus on "tactical" acquisitions in both the content and technology areas. McGraw said MHC will pursue "tuck-in" acquisitions that complement its core businesses, including purchases in the alternative basal and supplementary fields. When pressed by analysts, McGraw said any "acquisition of size" would have to be in a core area. Armour said that while Reed will look at niche acquisitions, it will be emphasizing internal growth, noting that the company will invest $50 million to upgrade its products and marketing efforts.