WPP plc (WPP) Ordinary 10p

Lower technology spending in the final quarter in the US contributed to slowing growth in the final quarter. The group’s net new business dropped to $4.5bn from $5.9bn, which included the loss of some work with pharmaceutical giant Pfizer.

Underlying operating profit was up 0.5% to £1.8bn. Growth was partly held back by higher investment in technology and increased client-related travel.

WPP reiterated plans for annual cash investment of around £250mn to support its AI and data strategy.

Underlying free cash flow rose from £53mn to £637mn, partly reflecting improved short term cash management. Underlying net debt was flat at £2.5bn.

A final dividend of 24.4p per share was announced, taking the full year payment to 39.4p, in-line with last year.

WPP shares fell 2.5% following the announcement.

Our view

Growth has all but ground to a halt for media giant WPP. The group’s media agencies boast many of the world’s biggest companies as its customers, with products and services spanning all parts of the advertising and communication spectrum. It offers services including analytics, paid advertising campaigns and PR. As an idea of scale, WPP boasts a global workforce of 115,000.

One major thorn in the side of this industry rose is slowing advertising spending in the US. Companies are pulling back on splashing the cash amid economic uncertainty.

Companies are very much in wait-and-see mode, which means marketing budgets aren't exactly flush. While this could cause pain in the short to medium term, we're pleased with progress under the hood.

WPP has had a laser-like focus on boosting its digital marketing offerings. The new company plan involves focusing on faster-growing end markets (like how to help clients succeed online) and technology. Hundreds of millions will be spent over the next few years, most of which will go on new staff, technology, including AI, and incentives.

Before it can reach a home stretch, it's worth remembering that WPP's agency business is still being nibbled away at, and it's turning to acquisitions to keep growth coming. WPP needs to prove that recent momentum can be harnessed and continued. The group's doing what it can to combat these challenges, including consolidating and streamlining its offering.

Looking further ahead it's important not to understate the challenge. There are cracks appearing in some of WPP's larger markets and margins are coming under pressure. In the wider market, growth in online advertising spend is slowing. And with rising competition from more nimble providers a threat that's only likely to grow, there are arguably limits to the market's mood where WPP is concerned. We’re also mindful of AI. This offers enormous opportunity for WPP, but also risk. There’s a chance the advertising and analytics landscape changes so fast that WPP is left behind if it doesn’t peddle fast enough.

The recent increase in debt is worthy of note, and increases the risk of future distributions to shareholders coming under review, particularly if margin growth comes under further pressure.

WPP is moving at a significant pace to future-proof the business. Streamlining efforts mean the company that emerges from these challenges could be stronger than when it started. The current price to earnings ratio offers the potential for further upside for investors prepared to take a bit more risk, but the longer-term challenges shouldn't be ignored.

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