WPP winds down guidance again as Sorrell makes plans for 'piranhas'

Sales remained negative for WPP in the third quarter as the advertising market continued to be hit by client cost saving, with America proving the most challenging.

Reported revenue for the three months to 30 September rose 1.1% to £3.65bn thanks to the weak pound, with constant currency revenue down 0.4% and like-for-like revenue down 2.0%.

Adding this to a tepid first half this means revenues and net sales were down 0.9% and 0.7% respectively at constant currencies.

As a result, the FTSE 100 company now expects full year LFL revenue and net sales growth to be "broadly flat", representing a steady climb-down since original sales guidance of 3% growth was issued last December, cut to 2% in February and 0-1% in August.

Full year operating profit margin to net sales is also expected to be broadly flat on a constant currency basis, rather than the 0.3% gain previously flagged, though long-term targets remained unchanged.

To react to the new client landscape, WPP boss Sir Martin Sorrel said the group had increased its "focus and urgency in implementing our four-pronged strategy of horizontality, fast-growth markets, digital and data".

Some of this effect may already be working, with net new business wins of $2.12bn rolling in during the quarter, making $6.36bn for the first nine months of the year, up significantly on last year.

In the first nine months of the year, 41.3% of group revenue came from digital, eCommerce and shopper marketing, up 2.8 percentage points from the previous year.

The UK was the strongest region in the quarter, but slowed compared to the second quarter, while Western Europe improved on the preceding quarter, led by Denmark, Italy, the Netherlands, Norway, Portugal and Spain.

But LFL sales worsened in North America, with a 5.1% decline amid further softness across almost all businesses, although data investment management and parts of specialist communications businesses showed an improving trend compared with the second quarter.

"North America remains our biggest geographical area of concern and focus," Sorrell said.

Emerging markets were dragged down by a "more difficult" Asia Pacific, as China and India came under pressure

Looking forward, Sorrell said the markets of Asia Pacific, Latin America, Africa & the Middle East, and Central and Eastern Europe currently are around 30% of the business but "have to be almost one-half in 3-4 years", though he acknowledged that Western multinational companies increasingly face real competition from local "piranha" companies as they develop stronger marketing and technology skills.

With digital already accounting for over 40% of the business against a current industry weighting of around 30%, Sorrell said WPP is therefore, "over indexed, but probably not sufficiently" and plans to make digital activities half of the business within 3-4 years.

Shares in WPP, which had fallen by 30% since Sorrell's first serious warning about the challenging state of the market in March, were in the red again on Tuesday morning at 1,284p.

"Sentiment towards WPP has been volatile for some time and short term uncertainty seems likely to persist until a more definitive picture of advertising spend trends emerges - particularly in the US," said analyst Roddy Davidson at Shore Capital.

"That said, this morning’s guidance looks broadly consistent with the trading comments communicated by the company at the interim stage and with our full year headline net sales growth and margin assumption following downgrades at the half year."

Davidson also note that high-level industry forecasts, although lower than earlier in the year, still suggest a supportive backdrop for international agencies during 2017 and 2018.

He remains positive on the group’s medium-term fundamentals, including: the quality of its operations and brands; its extensive international footprint; its track record of innovation and new business wins; and its overweight exposure versus peers to the digital categories and less well-developed regions that are expected to drive ad spend growth.