MAM

WPP's Q3 revenues up 9%

MUMBAI: Global marketing and communications giant WPP has announced that in the third quarter revenues rose by nine per cent to ?2.46 billion.


The revenue was up by 13.1 per cent in dollars to $3.9 billion and up 3.6 per cent in Euros to €2.8 billion. Revenue from India was up by 10.4 per cent, the agency said.


Revenues globally, in constant currencies, were up 8.5 per cent, chiefly reflecting the comparative weakness of the pound sterling. Excluding the impact of acquisitions and currency fluctuations, like-for-like revenues were up 4.7 per cent, less than the 6.7 per cent achieved in the first quarter and 5.6 per cent achieved in the second quarter, but against more difficult comparatives, with the third quarter like-for-like growth for the same period last year at 7.5 per cent. 
 
On the same basis, gross margin, which is a better indicator of top line growth and measure against costs, was up 5.5 per cent in the third quarter. Over the last two years, there has been a sequential improvement in the combined like-for-like revenue growth of 6.7 per cent in the first quarter, 10.3 per cent in the second and 12.2 per cent in the third.


On a constant currency basis, the geographic pattern of revenue growth chiefly reflected strengthening in the faster growing markets of Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe and an anticipated slowing in the US.


The US‘ third quarter revenues were up by 4.6 per cent, on a constant currency basis, compared with 6.1 per cent in quarter two. The UK improved significantly in the third quarter, with constant currency revenues up 8.9 per cent compared with 6.6 per cent in the second quarter and 7.7 per cent in the first. Western Continental Europe, although the slowest growth region, showed an improvement in the quarter, with revenues up 7.6 per cent compared to 5.9 per cent in quarter two and 2.2 per cent in quarter one, with some of this being driven by acquisitions.


Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe also showed an improvement in the third quarter with revenues up 12.4 per cent, similar to quarter one growth of 12.6 per cent, but above quarter two growth of 11.5 per cent. Within this region there was some improvement in the Middle East, with growth in the quarter, although there is still considerable and, if anything, increased uncertainty. Again within this region, all markets in Asia, with the exception of Japan, showed double digit revenue growth, with Mainland China up 26.6 per cent, India was up by 10.4 per cent and Singapore, one of the Group‘s largest markets in the region, up 11.9 per cent.


Revenues in the Brics were up 19 per cent, with the Next 11 up almost 15 per cent. The Civets were up by over 29 per cent. The new G8, highlighted by Goldman Sachs Asset Management chairman Jim O‘Neill was up almost 18 per cent.


By communications services sector, the pattern of revenue growth strengthened across all service sectors, compared with the second quarter, except consumer insight, within which custom research remains the drag, particularly in mature markets. On a constant currency basis, advertising and media investment management revenues grew by 12.5 per cent, compared with 11.4 per cent in the second quarter, with advertising up almost seven per cent and media investment management up by 21 per cent. The Group‘s public relations and public affairs businesses were up by 7.4 per cent, compared with six per cent in the second quarter, with improvement in almost all brands. 
 
The Group‘s branding and identity, healthcare and specialist communications businesses (including direct, digital and interactive) grew by 10.5 per cent, above the second quarter growth of 9.1 per cent and 7.9 per cent in quarter one. This improvement was driven largely by WPP‘s global direct, digital and interactive businesses, amongst others comprising OgilvyOne Worldwide, OgilvyAction, VML, G2, Possible Worldwide and Wunderman.


In the first nine months of 2011, reported revenues were up by 7.1 per cent at ?7.170 billion, up 12.9 per cent in US dollars to $11.5 billion and up by 5.2 per cent in Euros to €8.2 billion. In constant currencies, revenues were up by 8.2 per cent, chiefly reflecting the weakness of the pound sterling against most major currencies. On a like-for-like basis, excluding the impact of acquisitions and currency fluctuations, revenues were up 5.6 per cent and the more relevant gross margin up by 6.4 per cent.


On a constant currency basis, the pattern of revenue growth by region varied in the first nine months, although all regions, except the United States, strengthened in the third quarter. Although the United States softened in the third quarter up by 4.6 per cent, constant currency revenues were up 6.6 per cent year-to-date. The UK improved significantly, with revenues up 8.9 per cent in the third quarter and 7.7 per cent year-to-date, and with gross margin up by 10.4 per cent.


Western Continental Europe, although relatively more difficult, showed a marked improvement, with revenues up by 7.6 per cent in the third quarter and 5.3 per cent year-to-date, although, again, this was partly the result of acquisitions. Austria, Belgium, Germany and Switzerland all showed double digit growth in the third quarter, but France and particularly, Greece, Portugal and Spain remained affected by the Eurozone debt crisis. Revenues in Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe were up 12.4 per cent in the third quarter and 12.2 per cent year-to-date, driven by particularly strong growth in South East Asia and Africa.


In the first nine months of 2011, 29 per cent of the Group‘s revenues came from Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, a further increase of almost one percentage point, compared with the first half of this year and 1.5 percentage points over the first nine months of 2010 and against the Group‘s strategic objective of 35-40 per cent in the next three to four years.


By communications services sector, although again the pattern of growth varied, constant currency revenues strengthened across all sectors, with the exception of consumer insight. The rate of growth of the Group‘s advertising and media investment management, public relations and public affairs and branding and identity, healthcare and specialist communications (including direct, digital and interactive) sectors increased by over 100 basis points or over one per cent in the third quarter compared with quarter two. On a constant currency basis, advertising and media investment management showed the strongest growth, with third quarter revenues up by 12.5 per cent, compared with 11.4 per cent in quarter two and 12.2 per cent year-to-date. Public relations and public affairs was up 7.4 per cent in quarter three compared with six per cent in quarter two and 6.4 per cent year-to-date. Branding and identity, healthcare and specialist communications (including direct, digital and interactive) was up 10.5 per cent in quarter three compared with 9.1 per cent in quarter two and 9.2 per cent year-to-date.


The Group‘s consumer insight businesses were up by 0.7 per cent in the third quarter with gross margin up 1.7 per cent. Double digit growth in the faster growing markets of Asia, Latin America, Africa and the Middle East and Central and Eastern Europe was offset by poorer growth in the mature markets of North America, the UK and Western Continental Europe. Year-to-date, revenue was up two per cent with gross margin up by 2.5 per cent.


Digital and interactive revenues accounted for almost 29 per cent of total revenues, up 0.7 percentage points against last year and also against the Group‘s objective of 35-40 per cent in three to four years.


Additional information is provided in appendices 3 to 6, showing the third quarter and nine months revenue and revenue growth in reportable US dollars and Euros, to allow for better comparison with a number of our competitors, who report in these currencies.


New Business: Net new business billings of ?1.4 billion ($2.2 billion) were won during the third quarter, well up on the same quarter last year. Net new business billings won in the first nine months of 2011 were ?2.6 billion ($4.2 billion) and similar to the same period last year. The Group continues to benefit from consolidation trends in the industry, winning several large assignments from existing and new clients and ranking towards the top in the three new business league tables, reflecting relative competitive strength.


WPP adds that to date, it has seen little, if any impact of six global risks - feared Euro contagion, lack of attention to the US deficit, rising commodity prices, the impact of the tragic events in Japan, uncertainties caused by the Arab Spring and finally the possibility of the withdrawal of the post-Lehman fiscal and monetary stimulus - on client spending, although there was some geographic impact on Ireland, Portugal, Spain, Greece, Japan and the Middle East. However, the continuous macro economic gloom and despair in the media and elsewhere must have some impact on both corporate and consumer confidence. As a result, the marginal hire or investment by uncertain CEOs and Boards and marginal purchase of a car or house or holiday or domestic appliance by worried consumers must be affected.


Balance Sheet and Cash Flow: Average net debt in the first nine months of 2011 was ?2.7 billion, compared to ?3 billion in the comparable period last year, at 2011 average exchange rates, a decrease of ?332 million or $531 million. Net debt at 30 September 2011 was ?3 billion, against ?2.9 billion at the same time last year, at 2011 average exchange rates, an increase of ?123 million, reflecting an increase in acquisition activity and share buy-backs in the latter part of the first nine months of 2011. The Board continues to examine ways of deploying its EBITDA, (of over ?1.5 billion or over $2.4 billion for the preceding twelve months) and substantial free cash flow (of over ?950 million or approximately $1.5 billion per annum, also for the previous twelve months), to enhance share owner value.
 
WPP adds that there is still a significant pipeline of reasonably priced small and medium sized potential acquisitions, with the possible exception of digital acquisitions in the USA which remain over-priced and Brazil, where the market appears to be over bought. As a result, deals done continue to be of small and medium sized companies, focused on new markets, new media and consumer insight and will not be limited to ?100 million per annum as before, but will more likely total around ?400 million this year.


It will continue to seize opportunities in line with our strategy. In the first nine months of 2011, the Group continued to make small-sized acquisitions or investments in high growth geographical or functional areas. In the first nine months of this year, acquisitions and increased equity stakes have been focused on advertising and media investment management in India, the US, France, Germany, the Netherlands, Bahrain, South Africa, Brazil, China and Korea; in consumer insight in the US, Ireland, Germany, Russia, Lithuania and Kenya; in public relations in the UK; in direct, digital and interactive in the US, the UK, Austria, Brazil, China, the Philippines and Singapore and in specialist communications in the US.


Future Prospects: The parent company will be reviewing the operating companies third quarter revised forecasts in New York over the next two weeks. The preliminary, unreviewed figures show full year like-for-like revenue growth of five per cent and gross margin growth of 5.7 per cent. Although this implies a reduction in the top line growth rate in the fourth quarter, the two year revenue and gross margin growth remains strong in line with the rest of the first three quarters and, even more importantly, operating margins show continuous improvement in the fourth quarter, beyond the first half achieved improvement of 0.7 margin points. This augurs well for enhanced profitability, despite more difficult economic headwinds and industry comparatives.


Although it is too early to compile or estimate budgets for next year, despite current uncertainties, the prospects do not look dire, particularly given the record high levels of variable costs in the company‘s structure. Even though recent global GDP forecasts have been reduced by pundits like Goldman Sachs to 3.5 per cent and may be reduced further by the end of the year to say around three per cent, the World is growing at different speeds - the Brics and next 11 or the CIVETS or Jim O‘Neill‘s new G8 the fastest; the USA and Germany next; the UK, France, Italy and Spain next; and Japan the slowest, although recent restructuring investments have raised the short-term GDP growth rate.


Advertising as a proportion of GDP remains at depressed levels in mature markets post-Lehman and the faster growth markets remain under-branded and under-advertised. Nervous, risk averse clients, not only continue to invest in brand rather than in additional capacity in slow growth, predominantly Western markets, but also invest in brand behind new capacity in faster growth markets - a positive double whammy for our industry, even if some clients mistakenly believe, in our subjective view, that advertising should be a variable cost and not a fixed investment. WPP expects ad expenditure for next year to be further buttressed by the London Olympics, the European Football Championships and the US Presidential Election, all of which should add another one per cent or so to spending levels, as usual in a maxi-quadrennial year and take industry expansion into four per cent territory. WPP remains of the view that 2012 will not be the really challenging year. It is likely that European politicians will just about muddle through the current Eurozone crisis.


The rubber is really likely to meet the road, however, after the US Presidential Election in late 2012 and into 2013, when a newly elected American President will finally have to deal with the US deficit. We remain attracted to the "LUV" analogy, with an increasing emphasis on the "L" indicating the long slog in Western markets, in particular.


Future Objectives: In these uncertain times, the Group continues to concentrate on its long-term targets and strategic objectives of improving operating profits by 10-15 per cent per annum; improving operating margins by half to one margin point per annum or more depending on revenue growth; improving staff cost to revenue or gross margin ratios by 0.6 margin points per annum or more depending on revenue or gross margin growth; converting 25-33 per cent of incremental revenue to profit; growing revenue faster than industry averages and encouraging stronger creative standards and co-operation among Group companies.


Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe (including the BRICs and Next 11), revenues and digital revenues are both now approximately 30 per cent each of total revenues, which this year will be approaching $16 billion. We have now increased our previous targets of one-third of revenues coming from these geographic and services sectors to 35 to 40 per cent. Given these industry trends, the strategic focus is now centered, not only on strategic planning, creative execution and distribution, but on the application of technology and analysis of data, to the benefit of our clients and people. This strategy, WPP adds, should stand it in good stead in an increasingly challenging economic environment.

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