‘We’re back in business’: takeaways from WPP's Q3 update as it finally returns to growth
WPP has said it’s “back in normal business” after making "substantial progress" to return to growth for the first time since 2017.
The holding company posted a 0.5% increase in organic revenue, which rose to 0.7% when the sale of Kantar was factored in. It was a surprise performance following the 2.8% fall in the first quarter and a 1.4% drop in the second quarter.
“This is an encouraging outcome for the group,” said Alex De Groote, media analyst and senior adviser at Trillium Partners.
“With nine months of 2019 now complete, WPP's group revenue is therefore up 2.8% in reported terms, or 0% in like for like terms. Whilst these figures may not look very exciting, it is evidence that 'new WPP' remains pretty robust after the tumultuous events of 2018. There has been no 'tipping point'.”
The winning and losing agencies
WPP doesn’t break out the revenue figures of individual agencies in its earnings but chief executive Mark Read did single out the strong performance of some of its newly merged entities, including Wunderman Thompson and VMLY&R. They showed “a significant improvement compared with the first half,” with VMLY&R in particular growing in the third quarter both globally and in the United States.
However, agencies within its Healthcare and PR divisions struggled, said Read, alongside those in its “specialist” agencies divisions, including Geometry Global.
Its Global Team Blue offering has also suffered following the loss of Ford’s US creative business last year.
It’s not getting too excited about full-year guidance
Despite the positive result, Read cautioned that it was not revising its full-year guidance that like-for-like sales will decline overall by up to 2%. “We don’t want to be declaring victory in Q3 to declare defeat in Q4,” he said on a call with analysts.
“We’re not going to give a forecast quarter by quarter and therefore we’re not giving you an exact number for Q4,” he said. “We’re keeping the guidance where it is. If I was to make the number exactly what I thought it would be we’d get ourselves into a difficult situation.”
Earlier this month, Publicis was forced to downgrade its full-year guidance after reporting a 2.7% decline in organic revenue, sending its shares plummeting 12% overnight.
Being the first of the major holding groups to report for Q3, the stark outlook for the rest of the year had a knock-on effect to fellow holding companies and sent their shares on a downward trajectory.
“Mark Read should take a lot of credit for spearheading the bold changes at WPP over the last year or so, against a backdrop of structural and cyclical decline, including the part disposal of Kantar," added De Groote. "Whilst the group is 'not out of the woods yet' purely on the back of Q3 alone, it seems clear that investors should differentiate between the trends at WPP and Publicis."
The state of FMCGs
WPP's performance comes against a backdrop of mixed fortunes for many of its top clients, especially in the FMCG space which is considered a bellwether for marketing investment. Read said that FMCG brands, in general, had reported growth in the third quarter with six out of the nine FMCG companies within its top 30 clients reporting a positive performance.
But it has lost three major advertisers in this sector in recent months, including Johnson & Johnson's consumer healthcare business in the US.
Analysts were keen to understand the impact that wavering FMGC marketing spend is having on WPP’s business. Kraft Heinz has slashed its ad spend, for example, while Unilever and P&G have both moved large swathes of the advertising production in-house, though continue to increase marketing budgets.
“If you’d asked us a year ago there was pressure downwards from them,” said Read. “It’s more mixed today. We see some with a positive trend in budgets and some with a negative. If you saw P&G’s results, it reported an increase in marketing spend. So, I wouldn’t draw conclusions from the fact some are finding growth tougher."
However, he added that where they are spending is changing. Historically WPP has had the biggest share of spend that is now under pressure – traditional above the line. It’s seen some success by “broadening” the remit it has for these clients and again pointed to Wunderman Thompson and VMLY&R as agencies benefiting from their switch to digital.
“The conversation with Mondelez [which it won in 2018] is really interesting,” he offered as an example. “It’s about the focus and quality of creative work and mass personalisation and driving through an integrated creative and media.”
Kantar sold, GroupM next?
At its Annual General Meeting yesterday (24 October), shareholders approved the sale of WPP's majority stake in research division Kantar to Bain Capital, which has netted the company $4bn.
But former chief executive Sir Martin Sorrell, who remains WPP's largest private shareholder, had tabled the idea that GroupM, said to be worth $15bn, would be worth more to WPP if it was sold off.
Read blasted the suggestion and said the performance of GroupM this quarter was “marginally stronger” than the previous and put an end to any speculation that it would sell the media business.
“Normally we wouldn't respond to speculation, but it doesn’t make any sense at all,” Read said.
“I don’t know whether the maths is correct," he said of his predecessor's calculations. "In April we said clients want to bring things closer together, not apart. So, it makes no sense to break off media away from the business. How can it make sense to split it off? Many of the most successful client things have been through the integration and the thing in clients’ minds is how we’re integrating creative, data and media.”