Earnings analysis: WPP posts 32% profit drop, lackluster revenue for 1st half

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WPP Group revealed slumping profits, lower revenue and a downbeat industry forecast, dampening expectations for a second-half ad industry recovery.

"It seems unlikely that significantly improved performance will occur in 2002 and that any recovery will have to await 2003 or, perhaps, even more likely 2004," WPP warned in issuing its midyear financials.

For the first half, WPP said net profit fell by 31.7% to $165.1 million from $240.9 million for the same period a year ago.

WPP, parent of such agency networks as Ogilvy & Mather and J. Walter Thompson, said revenue declined 1.9% to $2.8 billion vs. the same period a year ago. Excluding acquisitions, revenue dropped more than 8%.

Revenue in North America, which comprises 44.7% of total revenue, declined 6.3%. The United Kingdom, which accounts for 16.3% of the total, grew 3.9%. In continental Europe, responsible for 22.7% of revenue, growth in revenue was 7.6%, and in Asia Pacific, Latin America, Africa and the Middle East-also 16.3% of the whole-revenue grew 3.3% for the first six months.

Advertising and media investment management, WPP Group's largest sector, contributing 45.8% of revenue, grew little-just 0.5%-in like-to-like time periods. Public relations and public affairs, responsible for 11.8% of total revenue, fell the most, declining 11.2% in revenue compared with the same period last year. Information and consultancy, which contributes 15% of total revenue, saw revenue grow 6.8% in the period. Branding and identity, health-care and specialist-communications revenue was flat with growth of 0.1%; that grouping accounts for 27% of total revenue.

The company's performance "reflects the continuing difficult economic conditions, particularly in the United States," the company said.


Given the continuing recession and recent stock-market declines, WPP management said that "even achieving last year's operating margins of 14% in 2002 will be difficult."

Net debt (including bank loans and corporate bonds) increased to $1.8 billion from $875 million in the year-earlier period.

WPP spent $65 million during the period on earn-out payments for previous acquisitions. WPP estimates show future earn-outs could cost $329.1 million. WPP, unlike rivals, has long included liability for earn-outs on its balance sheet; rivals now footnote the information. Following Omnicom Group's lead, WPP also has begun disclosing its liability to buy additional stakes in companies in which it has an interest; that could cost WPP $86.4 million through 2009.

On a like-for-like basis, staffing at midyear was 50,582, down 3% from year-end 2001's 52,238 and down about 9% from June 2001's 55,393. "Plans, budgets and forecasts of revenues will continue to be made on a conservative basis, and considerable attention is still being focused on achieving margin and staff cost-to-revenue or gross-margin targets," the company said.

As expected (AA, Aug. 5), WPP last week became the first major agency company to announce it will expense stock options, joining such corporations as Coca-Cola Co. in adopting the more conservative accounting approach. Rival Interpublic Group of Cos. is studying a similar move; an Omnicom spokeswoman said Omnicom's board will consider the issue in upcoming board meetings.

Fast Facts

First-half revenue: $2.8 B, -2%

Income: $165.1 M, -32%

Net new billings: $1.8 B

Short-term strategic priority: "Weather the recession"

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