WPP Reports Solid Growth for 2016 but Predicts Slower 2017

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Martin Sorrell
Martin Sorrell Credit: Dario Pignatelli/Bloomberg

WPP's fourth-quarter earnings were slow, but CEO Martin Sorrell presented a more positive picture for the full-year 2016 -- despite continued reference to price pressures.

Like-for-like revenues (excluding acquisitions) were up 0.5% in the fourth quarter, compared with 3.6% at rival Omnicom and 5.3% at Interpublic.

Across the year, however, WPP's like-for-like revenues were up 3%, with overall revenues up 3.7% at $19.4 billion. Profits before tax were up 7.2% to $1.8 billion, stripping out the effects of exchange rate fluctuations.

Speaking at a presentation to analysts in London this morning, Mr. Sorrell outlined some of the challenges faced by WPP, whose networks include Ogilvy & Mather, Grey, JWT, Mindshare and MEC.

In reference to Volkswagen Group, which moved its media account out of WPP's Mediacom and into Omnicom last June, Mr. Sorrell said, "Market share for market share's sake is not what we are seeking to do. In media pitches you can employ two different strategies. You can either say, 'this is what we think we can do' and mean it, or promise something that you know you can't do, but the client's going to be unable to figure out what will happen [and] the difficulty of tracking it."

"Or you can say I'm not willing to participate -- as we did in the case of VW -- in an online auction. The question in the online auction was, 'What are you prepared to discount current pricing by?' And the people who participated in the auction did not know what the current pricing was. So effectively you're bidding blind. [WPP] were doing it for 19 years and had been audited every year and told that [we] were pricing successfully -- in that case the online auction is asking what are you prepared to discount it by. Our people said even though they were the incumbent and they knew what the pricing was, they weren't prepared to go into that auction. Others were prepared to do it. It's a judgment call."

On a similar theme, Mr. Sorrell spoke out against extended lines of credit. He said, "There are clients who ask for 180 days, 120 days, 90 days' credit. The norm historically has been 45 days. We know that an Aegis client went belly-up in Spain, having been given two years' credit… We are not a bank. We are not an insurance company and we don't think it's right for clients to choose agencies based on their abilities as banks and insurance companies."

In response to a question about rival Interpublic's strong revenue growth, Mr. Sorrell said, "We tend not to take unprofitable business even if we are offered heavy volume games. This brings us back to [asking] what's the real metric you should focus on as analysts -- should it be revenues or net sales? And you know what our answer is on that."

WPP prioritizes net sales in its reporting. A spokesman said, "It is a better measure of real growth because revenue figures include billings figures on digital advertising where an agency is the principal. Net sales adjusts for this anomaly, and also strips out direct pass-through costs at zero margin in other parts of the group such as in data investment management."

On the issue of Snapchat's recent IPO, Mr. Sorrell said, "Snapchat's share price should be dependent on their ability to show effective ROI. The data is really important. I think you will hear a growing chorus from CMOs asking not just about the dependability of the data but the access to the data... That's where the pressure's going to come."

Answering a question about competition from consultants, Mr. Sorrell said, "[Accenture] wants to build the biggest internet advisory firm in the world. You have to take that seriously. This is a substantial consulting company. And Deloitte, who are our auditors – talk about frenemies – who we pay $30 million a year for an audit, are competing with us. McKinsey does too, but we work with McKinsey on clients. I don't think [the threat] is as substantial as the commentary indicates, but it's there."

Mr. Sorrell also spoke about President Trump. He said, "It's clear that the Trump administration is much more business-friendly and pro-growth than the Obama administration, no matter what you think of other aspects. The key thing is [whether there will be effective] implementation [of those policies]."

The world's largest communications group reported that January 2017 had been a "relatively slow start" to the year, with revenues up 1.5%. Mr. Sorrell predicted that 2017 growth would drop to 2% in 2017.

In North America, like-for-like revenues were down -2.8% in the final quarter of 2016, with the low numbers blamed on the strong comparatives. On a full-year basis, revenues were up 2%.

Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe saw revenue growth of 3.9% in the fourth quarter, which was the strongest of the year. Latin America had its second strongest quarter of 2016, with like-for-like revenue up 8.9%.

In Western Continental Europe, revenue growth was 3.4%, with Germany, Norway, Spain, Sweden and Switzerland performing strongest.

In WPP's home market, the U.K., like-for-like revenues were down 1.26% in the final quarter, again due to strong comparatives. Media and data investment management was up strongly, offset by weaker performances in advertising, public relations, direct, digital and interactive.

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