WPP’s like-for-like net revenue is expected to fall by between 4.2-4.5% over the first half, to around £5.0bn. Performance worsened over the second quarter due to “intensifying” macro pressures and one-off factors which weighed on net new business.
Due to the net revenue declines and severance action at WPP Media, first-half underlying operating profits are now expected to be in the £400-425mn range. This implies a margin of 8.0-8.5%, down 2.8-3.3 percentage points.
The weak first-half trading is expected to continue into the second half. As a result, full-year net revenue guidance has been downgraded from a decline of between 0-2% to between 3-5%.
Full-year underlying operating profit margin guidance has also been downgraded from flat, to a decline of between 0.50-1.75 percentage points.
The shares fell 13.7% in early trading.
Our view
WPP’s first-half performance fell short of group expectations as clients pulled back on advertising spending. With that trend now expected to continue into the second half, full-year revenue and profit guidance have been downgraded, which upset markets on the day.
At its core, WPP’s media agencies deliver products and services spanning all parts of the advertising and communication spectrum. It boasts some of the world’s largest companies as its customers, and provides them with analytics, paid advertising campaigns and PR. As an idea of scale, WPP boasts a global workforce of 115,000 at the last count. That’s a lot of mouths to feed and can amplify the downside to profits when revenue dries up.
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.
But keep in mind that WPP's agency business is being nibbled away at. The group's doing what it can to combat these challenges, including consolidating and streamlining its offering.
These ongoing restructuring and severance actions at WPP Media are set to bring long-term annual cost savings of over £150 million. But in the short term, the restructuring is proving a distraction for management and weighing on profitability.
The balance sheet was in decent shape the last time we heard. However, the group’s weak performance of late has put pressure on the valuation, pushing the dividend yield well above the long-run average. These payments are well covered by cash flows for now, but we can’t rule out dividends being wound back if performance doesn’t pick up in the near to medium term.
Tariffs aren’t likely to have a direct impact on WPP. But if they lead to an economic slowdown and WPP’s customers need to rein in costs, advertising budgets will likely be one of the first things on the chopping block. There hasn’t been much change in client behaviours yet, but the picture can change quickly.
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.
WPP’s progress hasn’t been as swift as some other names in the advertising world, which has seen WPP’s valuation fall well below the long-run average. The search for a new CEO remains ongoing, and whoever ends up in the role will need to hit the ground running if performance and investor sentiment are to improve.
Environmental, social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, WPP’s management of ESG risk is strong.
The group has a board-level sustainability committee assisting in its oversight of corporate responsibility and sustainability matters. Advertising companies collect, analyse and process large volumes of sensitive client data, and there are often large fines in place for failing to comply with privacy or security regulations. WPP’s due diligence process includes a review of ethical risks, such as bribery, corruption, and human rights issues.
WPP key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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