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WPP - growth downgraded

Net revenue fell 0.6% on a like-for-like (LFL) basis in third quarter, with declines led by weakness from technology clients and China.

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Net revenue fell 0.6% on a like-for-like (LFL) basis in third quarter, with declines led by weakness from technology clients and China. LFL net revenue growth for the full year is now expected to be 0.5-1.0%, down from 1.5-3.0%.

WPP had $1.4bn of net new business, taking the year-to-date total to $3.4bn. The group has combined Wunderman Thompson and VMLY&R to create a large agency named VML.

The shares fell 2.8% following the announcement.

View the latest WPP share price and how to deal

Our view

This is not the third quarter WPP wanted. Growth's stalled and the outlook's been downgraded. WPP's media agencies help companies in over 100 countries, across all areas of the marketing spectrum. With over 100,000 employees, it's no small fry. The biggest pillar of the group is its communications businesses. Companies need to promote their brands or products, and that's where WPP comes in. It offers services including analytics, paid advertising campaigns and PR.

This is a very difficult part of the market to operate in when times are tough. And the group's being stung by lower spending in tech and creaking economic activity in China. Companies are very much in wait-and-see mode, which means marketing budgets aren't exactly flush. This is a dynamic that's caused WPP to downgrade its targets for the full year for a second time, with net revenue growth looking like it will struggle to get off the ground. 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 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.

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 stared. 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.

WPP key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th October 2023