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WPP Lowers Revenue Forecast As Ad Industry's Woes Continue

Published on Oct 31 2017 5:36 PM

WPP Lowers Revenue Forecast As Ad Industry's Woes Continue

WPP Plc cut its sales forecast for a second time in three months as clients further reduced marketing spending, adding to evidence of the advertising industry’s distress.

The world’s largest ad company said Tuesday that sales growth excluding currency swings and takeovers is expected to be “broadly flat” in 2017. London-based WPP had previously lowered its growth forecast to between zero and 1 %.

WPP is having its worst year since the financial crisis, hit by some of its largest clients such as Procter & Gamble Co. and Unilever NV scaling back advertising budgets. Pressure from activist investors and companies struggling with disruption in their industries are the biggest contributors to reduced marketing spending, Chief Executive Officer Martin Sorrell said.

"There is an increasing focus on cost reduction,"  he said in a statement. "These conditions will probably continue, maybe at less stressful and lower levels after one-time reductions this year."

Shares of WPP had lost 29% this year through Monday, leaving them at a “compelling price point”, Pivotal Research analyst Brian Wieser said in a note to clients, as he upgraded the stock to buy.

"It should never be all doom and gloom for agencies," Wieser said, "There is still significant value in the stock."

The shares advanced 2.4% to 1,324 pence at 12:44 pm in London, after earlier falling as much as 2.7%. In August, the stock had its biggest slump in 17 years after WPP slashed its full-year net sales growth forecast from 2 percent.

Troubles for WPP, which also works for brands such as Ford and Marks & Spencer, have been replicated across the advertising industry. Competitors Publicis Groupe SA, Interpublic Group of Cos. and Omnicom Group Inc. all reported falling third-quarter revenue this month, leaving their stocks down sharply on the year.

Competition

In addition to cost-cutting by clients, rising competition from consulting firms and the trend of advertisers increasingly working directly with the likes of Facebook Inc. and Google on their digital marketing is putting agencies under pressure, said Paul Sweeney, an analyst at Bloomberg Intelligence.

Agencies have seen particular pressure in their high-margin ad-space buying businesses, amid calls for greater transparency over fees charged and a trend of more advertisers doing media-buying in-house. Sky Plc is reviewing its 400 million-pound ($527 million) annual ad-placement budget, most of which is managed by WPP’s Mediacom, and McDonald’s Corp. is reviewing the approximately $2 billion it spends on media with Omnicom, according to a report by the Wall Street Journal.

Like-for-like net sales in North America, WPP’s biggest region, declined 4.9% in the third quarter, driven by weakness across all divisions. The UK. was WPP’s strongest region, with like-for-like net sales rising 2%.

"It’s tough, but we’re not talking meltdown," said Sarah Simon, an analyst at Berenberg. "It’s continuing the trend."

WPP also cut its constant-currency operating margin forecast for 2017, now expecting that metric to be "flat" after previously projecting an improvement of 30 basis points. The cut was more surprising than the revenue-forecast reduction and probably reflects the reduced prospect of high-margin ad-hoc project work in the fourth quarter, Liberum analyst Ian Whittaker said in a note to clients.

News by Bloomberg, edited by Checkout

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