WPP sees erosion in profit margin growth
But CEO Read says he will not continue additional spending to spur growth
WPP Plc’s profit margin downgrade will raise questions over the long-term margin growth targets.
CEO Mark Read’s tenure got off to a rocky start, with the stock plunging as much as 8.6 per cent in London, after he lowered the full-year profit margin outlook during his maiden earnings release as the head of the world’s largest advertising company. The company has successfully defended its accounts with some major clients and won others, boosting the shares in recent weeks.
Even so, risks remain, including at its largest client Ford, which is conducting a global advertising review.
Setting up strategy update
Yesterday’s comments signal WPP may consider disposing of significant parts of its market research assets later on, as it sets up a strategy update before the year-end, Liberum wrote.
Revenue was slightly better, margins slightly worse than expected. Main focus is likely to be on changes to targets, with full-year revenue guidance slightly improved but margin guidance down. Longer-term moderation of guidance “makes sense and is prudent, especially as WPP still has significant market research assets that its main competitors do not have and which drag down profits.”
Company commentary suggests it may look to dispose of at least significant parts of its market research assets later on, which would both improve group performance and “essentially resolve” any balance sheet concerns.
Read has signalled he would spend more to revive growth at the world’s biggest advertising group. It suggests Read is willing to forgo some earnings for now in order to defend business with big clients, especially in the US where consumer goods giants are cutting their ad spending and as power in online advertising shifts to Alphabet Inc.’s Google and Facebook Inc.
Read has already sold minority stakes in some businesses and signalled he could merge some WPP brands.
Read also boosted the company’s revenue forecast slightly for the year in an emailed statement. Like-for-like revenue less pass-through costs, a key measure of WPP’s operating performance, is now expected to grow in line with the firsthalf of the year, when it rose 0.3 per cent. It had previously forecast no change.
Review underway
WPP veteran Read has said there were “no sacred cows” as he tries to overhaul a sprawling global business consisting of more than 100 brands so it can compete with the US tech giants and global consulting firms as they muscle further into advertising.
Read also vowed to bring a new management style that was “inclusive, respectful, collaborative, diverse”.
He said a review of WPP’s structure and underperforming operations, particularly in the US, was underway and the company would provide an update by year-end.