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WPP ‘taken by surprise’ as ad spend stalls, but are industry analysts?

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By Sam Bradley, Journalist

August 4, 2023 | 9 min read

WPP has cut its revenue predictions for 2023 as the tech spending slowdown in the US hit its creative agencies. Analysts break down the results.

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Holding company WPP released financial results for the first six months of the year today / The Drum

Falling marketing investment by US tech companies continues to affect large agency groups. And now WPP is feeling the sting.

The holding company – the largest employer in the advertising industry – said that “reduced spend across the technology sector and delays in technology-related projects” hit revenues at subsidiaries Wunderman Thompson, VMLY&R and AKQA in its quarterly statement to investors. Revenues less pass-through costs (the company’s equivalent term for net revenue) in North America fell 4.1% in the second quarter of 2023 and 1.2% during the first six months of the year.

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Greg Paull, partner at consultancy R3, notes that WPP’s core creative agencies took the brunt of the decline. “WPP’s traditional creative agency business is still struggling to show growth as client needs for content continue to bifurcate,” he says. “The opportunity for the group is going to be more Coca-Cola-like successes where creative, media and data are linked together.”

”This is a gloomy, global marketing picture,” says Forrester’s Jay Pattisall. ”WPP showed a trickle of growth, curtailed by US performance and its’ exposure to technology clients. Tech represents about 18% of WPP business and includes Google, Meta and Microsoft. WPP is the second advertising holding company to point to a drop in performance in its creative agency agencies during Q2 (the other being Publicis.) The +2% organic growth is the lowest of all the major advertising holding groups. And with WPP, Omnicom, IPG, Havas and Publicis all reporting single digit growth in Q2, its clear the post-COVID digital growth boom in agencies is done for now.”

Client pauses on investment in project-based work also affected its specialist agencies, such as BCW and GTB; that portion of WPP’s business saw net revenues fall 1.6% over the last three months. Revenues from telecoms, retail and automotive fell, too. Chief executive Mark Read said, “the gap between our expectations… and today… took us a little by surprise.”

Revenues in the US were “impacted in the second quarter by lower spending from technology clients and some delays in technology-related projects,” he told investors. “The general trend is one of cost control and a focus on margins,” he added.

The US is the largest advertising market globally (six-month revenues from the US amounted to more than the revenues from Asia Pacific, Latin America, Africa, the Middle East and central and eastern Europe combined). Still, prospects for WPP in other regions were rosier.

Though global like-for-like growth in the first half of the year was only 2%, growth remained strong at media house GroupM (6.1%) and in the UK and Western Europe. WPP’s domestic British business saw like-for-like growth of 12.7%. And although Read said growth in China was still slower than expected, WPP recorded 4.8% growth in the second quarter.

For Matt Lacey, partner at Waypoint Partners, GroupM’s performance suggests that large media AOR accounts are still a “safe haven“ immune to competition from challenger groups. But WPP’s traditional creative businesses may continue to be low-growth prospects without significant change, he adds.

“It seems to be the brand creative stuff that tech firms are pulling back on. I know [WPP] are very keen to protect that and suggest that it’s not a trend that will continue... but as spectators of the industry, have we not seen brand creative in its most traditional form continue to be squeezed?”

He notes that smaller competitors such as S4 Capital and Stagwell have pursued a more closely integrated model between their creative and media businesses. ”They’re setting themselves up around combining media data and creativity. But [Holding company] creative agencies are sat there being separate to media, still – will they continue to be squeezed? That could be why we’re seeing them place bets on things like influencer marketing and other specialist areas,” he says, referring to WPP’s acquisitions of Goat and Obviously earlier this year.

Tony Walford, partner at Green Square, tells The Drum that “these results are pretty much as predicted and it’s good to see Q2 growth accelerating, particularly for the UK, together with the strong performance in GroupM and resilience in WPP’s CPG clients (a sector which can tend to reduce marketing in challenging times).2

“That said, there’s been a clear drop in US revenues due to reduced tech client spend – a trend we’re seeing across our clients exposed to that sector, and as reported by S4 last week. Shares are down 6.5% on the news, which has knocked around £0.5bn off WPP’s value and this is surprising as these aren’t particularly bad results overall.”

WPP isn’t the first major agency group to see revenues impacted by lower tech client spending. Last month, figures released by Omnicom and Interpublic Group (IPG) revealed that client caution among tech firms had hit their bottom line. And its results in the year’s first quarter also registered a hit from the sector.

Slow tech client revenues are unlikely to pick up this year, Read said. “We expect the pattern of activity in the first half to continue into the second half of the year,” he told investors.

“I don’t have a crystal ball. We’re at a unique point; growth has slowed, and companies have driven their share price by rebuilding margins... I would expect it to revert but we're being cautious about the likelihood of that happening during the course of this year.”

Read dedicated time during his investor presentation to highlighting progress made integrating generative AI, particularly its alliance with chipmaker Nvidia.

“AI will be fundamental to WPP’s future success and we are committed to embracing it to drive long-term growth and value,” he said.

Patissall concurs. “US elections and an Olympics in 2024 will prop up some ad spending next year. But AI is the marketing category’s best opportunity to provide substantial long-term growth,“ he tells The Drum. “And WPP’s commitment and investments in AI is a signal for its bounce-back in 2024. If that comes to pass, I would anticipate investments from Nvidia, Satalia and AI partnerships to start providing growth next years in the content and production agencies using generative AI and virtual technology.“

But, Walford notes, “they’ve given no commercial guidance as to what it means in revenue generation or cost savings, or indeed how its use will affect WPP’s operations and client delivery. We’re wondering when all the hype and talk around AI will actually be translated into measurable tangibility – my gut tells me it will come hard and fast (good or bad), but we will have to wait and see.”

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