Ciesco: WPP brings up the rear as marketing groups struggle in 2017 – UK is strongest region

By Ciesco.

WPP, the world’s largest marketing group, suffered its worst year since the 2009 recession in growth terms in 2017, with like for like revenue (which factors in currency and acquisitions) down 0.3 per cent, on total revenue of £15.3bn.

Following the announcement, shares in the company had their biggest drop in 20 years, falling 13 per cent. Looking at individual business sectors, Advertising and Media Investment Management performed the best in revenue growth and constant currency terms. However, like for like revenue was
down 0.1 per cent over the year. Within this, the traditional creative business has under-performed, while the media business has seen significant pickup.

Growth was weak generally across all geographic markets with North America the worst performing, down 2.3 per cent like for like over the year. The UK continues to be the one of the few bright spots for the company with 4.8 per cent like for like growth, and an impressive 8.4 per cent growth in the final quarter.

WPP blamed its poor performance in 2017 on both cyclical and structural factors. Throughout the year many large multinational clients cut their marketing costs amid pressure from activist investors. Furthermore, consultancies such as Accenture have emerged as serious competitors to the ad agencies.

Longer term, tech disruption continues in the industry, with more advertising spend going online to Google and Facebook.

New York-based Omnicom Group was the strongest performing holding company in 2017, with organic growth of three per cent on revenue of $15.3bn. Despite this, Omnicom missed analyst expectations for Q4, and their share price fell 5.8 per cent following the announcement, and has continued to fall, currently trading close to ten per cent lower.

Regionally, organic revenue growth was very strong in the UK (5.1 per cent), Europe (9.4 per cent), Latin America (16.8 per cent), and the Middle East and Africa (12.8 per cent). However, North America, which accounts for 57 per cent of Omnicom’s revenues only saw organic growth of 0.6 per cent for the year, and hence held the business back. This was significantly below analyst forecasts, and was due to a reduction in client spending, and lower political spend in PR compared to the 2016 elections.

All five of Omnicom’s disciplines saw positive organic growth, with CRM Execution & Support (four per cent), and Advertising (3.9 per cent) being the best performing by far. PR, the worst performing sector, rose by just 0.3 per cent.

Publicis had a more positive 2017 following a couple of weak years for the French group. While organic growth over the year was only 0.8 per cent, the firm showed strong momentum over the year with sequential improvements in organic growth from Q1(-1.2 per cent) to Q4 (2.2 per cent). Performance in the final quarter was in line with expectations, and was seen as reassuring by the market, where its share price increased by over five per cent following the announcement.

North America was a particularly encouraging region for Publicis. Although organic growth was only 0.5 per cent over the year, there was great acceleration of growth in the region, with 3.7 per cent in H2 vs -2.4 per cent in H1. This reflected good momentum from a number of client wins over 2016 and 2017 including Hewlett Packard, McDonald’s and Carrefour.

Latin America (4.8 per cent) and Middle East Africa regions (4.8 per cent) were also very strong over the year. European performance (1.3 per cent) was weaker, with a disappointing -1.6 per cent growth rate in H2. Within Europe though Italy (four per cent) and the UK (5.5 per cent) stood out but growth in Germany was particularly poor, falling 6.9 per cent.

Interpublic Group’s Q4 earnings were met with the greatest amount of enthusiasm from the market. While full year organic revenue was only modestly up 1.8 per cent over the previous year, there was very strong momentum coming from Q4 organic growth of 3.3 per cent over the prior-year period. These results delivered on IPG’s updated targets, and performed well above analyst expectations. Following the announcement, the company’s share price increased by more than ten per cent. Mediabrands, McCann Worldgroup and FCB were cited as driving overall growth.

Looking at individual regions, IPG performed particularly well relative to the other agencies in organic growth terms in the US (two per cent over the year and 3.47 per cent in Q4) and Continental Europe (3.4 per cent). As with the other networks, UK growth was solid at 4.1 per cent over the year. Asia Pacific was the worst performing region with negative organic growth of 2.5 per cent.

North America continued to be an area of concern for the four companies with all failing to make significant gains in the region. WPP in particular performed very poorly with negative growth of 2.3%. This is a trend that has continued for more than a year, and is likely a result of activist investors having more influence on cost cutting plus the greater relative importance of digital advertising vs television in North America. In the US digital ad spending overtook TV for the first time last year.

The holding companies showed a good performance across the board in the UK in 2017. This however may change going forward though with uncertainty around Brexit negotiations, general headwinds in the economy and the slowdown in the rate of digital ad spend growth in the UK.

Outlook

Following WPP’s poor performance in 2017, the company predicts a continuation of the challenging conditions it faced last year, forecasting a slow start to 2018, with a no-growth outlook for the rest of the year. This is in spite of 2018 having a number of big events such as the Football World Cup in Russia, Winter Olympics in South Korea, and US midterm elections.

CEO Sorrell has upped WPP’s strategic efforts, aiming to simplify the company’s structure and making it more unified and coordinated.

Although Omnicom performed the best of the holding companies with organic growth of three per cent, its Q4 earnings fell well short of expectations, disappointing given IPG and Publicis’s positive results that had made some consider the possibility of an industry-wide recovery.

CEO John Wren blamed the results on client losses earlier in 2017 impacting results, and he expects this to continue into the first part of 2018. Omnicom forecasts organic revenue to grow between two and three per cent, in line with IPG. As with other firms, Omnicom also expects to continue to invest in its digital, data & analytics capabilities.

Publicis CEO Arthur Sadoun (below) was pleased eith the progress of the group, especially considering that it comes amid its own “transformation.” Key goals for the firm going forward continue to be cost cutting, and the continuing move to a ‘client-centric connecting platform’ with data, content and technology at its core.

IPG CEO Michael Roth is bullish about the company’s financial strength, as well as its future prospects, with Q4 results suggesting that pressures on big brands’ advertising budgets may be easing. Given this, the firm decided to increase dividends by 17 per cent, and increase share repurchases by an additional $300m.

For 2018, IPG has targeted slightly faster growth rate than the previous year of two to three per cent.

Ciesco is a boutique corporate finance advisory firm specialising in the digital, media, marketing and technology sectors.

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