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Tech client caution could reverse Dentsu’s push for CT&T revenues, say analysts

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By Sam Bradley, Journalist

November 15, 2023 | 7 min read

The Japanese holding company issued a profit warning in its Q3 results as the proportion of revenue from customer transformation and technology (CT&T) fell – despite a long-standing push to devote business to digital transformation.

The Dentsu corporate wordmark, against a green background

The holding company released financial data for the third quarter yesterday / The Drum

Dentsu, which owns networks such as iProspect, Merkle and Dentsu Creative, reported lower-than-expected revenues for the third quarter of the 2023 financial year.

The results cap a depressing period for many of the industry’s largest entities. WPP, S4 and IPG also reported revenue declines, while American group Omnicom reported nearly flat commercial growth over the third quarter.

According to Forrester principal analyst Jay Pattisall, the results are indicative of industry-wide trends – such as client spend on technology and transformation services running out of steam – while Dentsu’s own business model overhaul is yet to bear fruit.

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“Dentsu’s tech business is not the only agency holding company tech business down right now – that is a category trend,” he says.

A 6% organic revenue decline and shrinking margins were blamed by the company’s leaders on a “lengthening of the sales cycle” in Europe and Asia Pacific. Dentsu has revised its organic growth expectations for the full year to -5%. Dentsu employs around 72,000 people worldwide but it only recorded organic growth in its home market of Japan, which accounts for approximately 40% of its overall revenue.

Revenues declined 6.3% in the US, 9.7% in Europe and the Middle East and 8% in the wider Asia Pacific region. Organic revenues for the group as a whole have fallen in each quarter of this year, though the decline in the third quarter was the harshest yet.

Hiroshi Igarashi, president and chief executive of Dentsu, told investors: “Our third quarter performance continued to show the impact of the reduced spend from clients in the technology and finance sectors, as well as project delays within customer transformation and technology. I and the wider executive team remain focused on returning the group to growth.”

The company will take some cheer from the fact that US revenues, while still declining compared with last year’s figures, has seen “sequential improvement” – that is, the revenue decline this quarter wasn’t as bad as the one in July. It picked up new accounts over the quarter, including Kraft Heinz, Enterprise and Papa John’s. “Revenues have stabilized and we have a number of account wins that demonstrate what we can achieve when we drive collaboration and empower our people to thrive,” said Igarashi.

But stalling progress on a key aim for the chief executive – growing the proportion of revenue derived from digital transformation services – points to an area of concern. At the end of 2022, 32.3% of Dentsu’s income came from customer transformation and technology services, led by Merkle. This year, that continued rising to 35% in the summer before falling 2% in the last three months.

Client caution around larger projects, especially after the CT&T gold rush of the last two years, has likely held back investments, says Pattisall. “After at least two years of really intense technology transformation initiatives inside organizations so that they could be able to keep up with consumers during Covid, they’ve pressed pause on some of that spending out of concern for the economy and the impact of inflation.”

Dentsu, still in the midst of a long-running reorganization of its many agency properties in the wake of its Aegis acquisition, may have to wait to begin to see the benefits of those moves. Pattisall suggests that the acquisition of Tag and the shifting of key capabilities between Merkle, Dentsu Creative and iProspect (the former’s media business was transplanted into the latter this year) should begin to drive growth soon.

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“Some of their recent moves with Merkle really haven’t taken full effect yet. They’re still putting some of the pieces in place to be able to move Dentsu’s business along in terms of technology transformation and business model transformation. And some of the pieces, in particular Tag, just haven’t really come to fruition yet,” he says.

In contrast, the holding companies that began overhauling their own business models earlier – such as Publicis Groupe – have not taken the same commercial impacts as rivals.

“Publicis is much further along in this technology and business model transformation,” says Pattisall.

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