Ciesco: WPP biggest in 2016, Interpublic is growing fastest

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WPP reported record revenues in 2016 with £14.4bn ($20bn), an increase of 17.6 per cent from the previous year, and a record profit before tax of £2bn ($2.6bn), up 26.7 per cent. However, CEO Martin Sorrell warned of a slowdown in growth in 2017 due to political uncertainties and a slow start to the year, sending shares in the FTSE 100 group down 7.6 per cent on the morning of the earnings release.

On a like-for-like basis (organic) which excludes the impact of acquisitions and currency movements, net sales grew 3.1 per cent, slower than both IPG and Omnicom. Reported EBITDA (earnings before interest, tax, depreciation and amortization) grew to £2.4bn up 20.8 per cent from £2bn in 2015, or up eight per cent on a constant currency basis. WPP’s Advertising and Media Investment Management division enjoyed the highest organic net sales growth of the year, with 3.7 per cent growth. Data Investment Management was the poorest performing divisions, with just 0.9 per cent growth.

Omnicom’s reported revenue grew 1.9 per cent to $15.4bn in 2016, driven by organic growth of 3.5 per cent, although this is down from the 5.3 per cent organic growth enjoyed in 2015. The reported growth was also made up of 0.3 per cent from net acquisitions and reduced 1.9 per cent due to currency fluctuations, largely caused by the strengthening dollar and weakening pound.

Omnicom’s advertising division, which accounts for over half of the group’s revenue, was the fastest growing discipline of the year, reporting 5.9 per cent organic growth. EBITDA for the year is $2.3b, up 4.1 per cent from the previous year and representing a 14.9 per cent margin.

Publicis reported revenue for the year grew 1.4 per cent to €9.7bn ($10.8bn). Organic growth of 0.7 per cent was the weakest of the four big marcoms companies, and down from the previous year’s 1.5 per cent. Publicis’ poor organic growth was largely due to the exceptionally weak -2.5 per cent growth in Q4. Revenue was boosted 2.6 per cent from acquisitions and reduced 1.9 per cent by foreign exchange movements.

2016 was the year Publicis implemented its new organisational structure aimed at encouraging greater collaboration between agencies, known as ‘the Power of One.’ The group also announced the succession plan for Maurice Levy’s departure, with current creative chief Arthur Sadoun taking over the leadership in June. Publicis made headlines earlier this year by announcing a €1.4bn write-down of Publicis.Sapient, the digital business it acquired back in 2015 for $3.7bn, indicating that the 44 per cent premium Publicis paid at the time was far too high.

EBITDA, which is not impacted by the impairment charge, increased 1.3 per cent to €1.7bn ($1.9), maintaining a 17.3 per cent margin. However, net income fell significantly, leaving the group with a €0.5bn loss for the year.

Interpublic Group once again experienced the strongest organic revenue growth of the four largest holding companies with five per cent, down from 2015’s 6.1 per cent. Reported revenue was up 3.1 per cent to $7.6bn, with acquisitions accounting for just 0.3 per cent and currency fluctuations reducing revenue by 2.1 per cent. EBITDA grew strongly in 2016 with $1.18bn up 17.2 per cent from $1bn in 2015.

IPG’s Integrated Agency Networks (IAN) which includes McCann Worldgroup, FCB, MullenLowe and IPG Mediabrands witnessed the strongest organic growth, with 6.7 per cent in Q4 and 5.3 per cent in the full year. Organic growth was stronger outside of IPG’s home region of the US, with 5.8 per cent internationally outperforming 4.4 per cent in the US. This was particularly apparent in Q4, with 7.8 per cent vs. 3.3 per cent.

Geographic Overview

The UK was WPP’s slowest-growing region in terms of organic net sales growth, with 2.1 per cent. CEO Sir Martin Sorrel, who was openly opposed to Britain leaving the EU, has since said WPP needs to expand in Europe to better serve clients as business potentially moves from London.

Contrary to WPP, Omnicom performed particularly well in the UK, with impressive organic growth of 8.5 per cent in Q4 and 4.9 per cent in the full year. However, due to the sharp drop in the value of the pound after the UK’s EU referendum vote result in June, reported revenue in the region was down 11 per cent in Q4 and down 6.8 per cent for the year. Omnicom’s strongest region was Africa Middle East, with 11.7 per cent organic growth, although the region accounted for less than two per cent of annual revenue for 2016. North America, which accounts for nearly 60 per cent of total revenue, was one of Omnicom’s weaker performing regions, with by 2.4 per cent growth.

Similarly to Omnicom, IPG experienced very high growth in the UK, with impressive organic growth of 11.7 per cent in Q4 and 8.5 per cent in the full year. However, this was largely eroded on a reported basis due to the weakening pound. Elsewhere, IPG experienced growth above four per cent in all regions, with the exception of APAC, which posted organic growth of only 1.7 per cent.

Publicis lost some key clients in 2015 as part of the global ‘mediapooloza’ when an unprecedented number of large companies put their accounts up for review at the same time, and the group’s 2016 earnings are showing some of the damage done, with organic revenue growth in North America at -2.2 per cent in the full year and a huge -6.9 per cent in Q4. The group did, however, perform well in Europe, with 5.9 per cent organic growth, the highest of the four companies.

Outlook

All companies highlighted uncertainty caused by 2016’s profound geopolitical changes in their earnings calls, largely referring to Trump’s surprise win in the US elections and the UK’s vote to leave the EU. However it is not clear whether either of these have had a material impact on the companies’ earnings. Interestingly, the UK was a particularly strong performing region for American groups Omnicom and IPG. IPG CEO Michael Roth stated “with respect to the US and the UK, while these uncertainties bear watching, we have not to date seen significant underlying changes to the solid demand for our services that has characterised the last few years.”

WPP is targeting two per cent growth for 2017, lower than market expectations, noting slow global GDP growth, political uncertainty and the key client losses of Volkswagen and AT&T as reasons for the lower than usual target.

CEO Ciesco CEO Chris Sahota (left) says: “There has always been a strong correlation between holding companies’ revenue growth and country GDP growth. With North America accounting for around 60 per cent of both Omnicom’s and IPG’s revenue, both companies and their investors will be hoping Trump’s proposed policies of deregulation and tax cuts in the US will boost the economy.

“Elsewhere, in Europe, elections will take place throughout 2017 in the Netherlands, France, and Germany, which will also be influencing factors. As will Theresa May’s plans to trigger the EU treaty’s Article 50 exit clause by the end of March, formally starting the process of Britain exiting the EU.“

2016 was another challenging year for Publicis, with organic growth of 0.7 per cent worse than the previous year’s 1.5 per cent growth. Outgoing long-term CEO Maurice Levy had stated 2016 would be a transitional year while they integrate their new organisational structure. Problems with Publicis were further highlighted by the €1.4bn writedown of Publics.Sapient, which Levy puts down to “a business plan that was probably too ambitious.” Arthur Sadoun will take over the position of CEO, only the third in the company’s 91-year history, in June. With key media client losses, billion-dollar write-downs and negative growth in North America, Sadoun will be keen to move the newly restructured business back to the same levels of growth as its competitors.

IPG, which also enjoyed the highest organic growth of the four in 2015, highlighted intentions to invest further in data and analytics for its media division IPG Mediabrands, rather than bolting on an acquisition, with the intention of developing Mediabrands’ data stack into a platform that will serve all clients. IPG is targeting organic revenue growth of 3-4 per cent for 2017, the same as it had originally predicted for 2016 before updating it to 4-5 per cent in October.

This is an updated version of n earlier story.

Notes:

Source: All data obtained from WPP, Omnicom, Publicis and Interpublic Group of Companies’ 2016 earnings reports and presentations.

Organic Growth: the year-on-year increase or decrease in revenue from the prior period, excluding the FX impact and net acquisition revenue

For WPP, net sales figures and organic net sales growth are used rather than revenue and organic revenue growth, as they show underlying trends more accurately, given the increase in both online media buying as principal together with pass-through costs for data investment management.

Ciesco is a boutique corporate finance advisory firm, specialising in the digital, media, marketing and technology sectors. Ciesco advises clients on mergers & acquisitions and corporate strategy.

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