The UK-based WPP has problem clients in the US whose spend via creative agencies has suddenly slowed.
The world’s largest advertising company, with about 37% of its business in the US, saw its US revenue fall 4.5% and its North American revenue dip 4.1% in the June quarter.
Overall the company reported like-for-like revenue growing 2.3% to £3.76 billion in the June quarter and 3.5% in the half year.
However, WPP now expects full year growth at 1.5%-3%, down from previous estimates of 3.5%.
The reason is technology companies have unexpectedly slowed their spend.
WPP CEO Mark Read says these are some of the world's largest advertisers.
“And the impact on us is greater given that we have 18% of our revenues from technology companies,” he told a briefing of analysts.
“We had flagged that we've seen a little bit of weakness earlier in the year, but I think it really accelerated in the second quarter.
“Perhaps it took us a little bit by surprise.”
WPP has taken a cautious view about the pattern of spending by technology clients and on technology projects in the second half of 2023.
The rest of the world is performing well and the problem is largely concentrated in the US.
“While there's more positive signs in the US regarding the control of inflation, there are also issues around consumer spending as COVID savings get spent,” says Read.
The reasons differ by client.
“Actually not all clients are down but the general trends are one I think cost control; a focus on margins after a significant slowdown in their own rapid rates of growth; and perhaps a different stage of the innovation cycle,” he says.
“We've also seen delays in decision-making on some technology-related projects, primarily in our creative agencies that is Wunderman Thompson, VMLY&R and AKQA.
“We saw work being pushed out and lower revenue in technology consulting and development parts of these companies.
“In this context, it's worth reminding ourselves that our creative agencies have a broad service offer and an increasing amount of their work comes from outside of the traditional agency remittance areas such as marketing technology, e-commerce, data consulting and other technology-related services.”
And this meant a fall in North America of 4.1% in the June quarter following growth in the three months to March.
“There are some other minor elements impacting this from some weakness in the telco sector linked to technology delays on a client, and also a client loss in the retail sector.”
Read says the technology clients, after two to three years of strong growth, had cutbacks to make.
“And then at the same time I think we're at an interesting point in the innovation cycle where they've got a lot of products ready to market, but the business models are not necessarily entirely clear for them,” he says.
“And if they've become clearer, I think that we'll see a greater volume of marketing around many of these new products.
“We're not going to call them out one by one but we are confident that our relationships are in a good place.
“This doesn't reflect the loss of assignments but we don't see any reason why their spend should not recover in the future.
“Our clients in some of the world's largest companies by market capitalisation, they're growing and investing in exciting new areas but we do believe that they need to put significant investments behind their brands and into their customer relationships in the future.”
Read says WPP has a “very strong” pipeline of new business for the rest of thai year and into the next.
“We did have one loss in the healthcare sector so we'll have to see how that plays out over the balance of the year and into next year,” he says. “It will be a little bit of a drag.
“Perhaps, some of that pipeline is built up because of the length of decision-making in people. But we have got a strong pipeline. And we continue to have a strong offer.
“I think lead in many areas. There's many strengths in WPP's business that I think will be reflected in our new business in the future.”
The latest profit results by the big digital platforms show improving advertising revenue and margins.
Analyst Matthew Walker from Credit Suisse says the advertising numbers are getting better for those tech companies.
“So when do you think that they will start marketing again?” he asked Read during the analyst briefing.
“Is it related to product innovation, or is it going to be related to their revenue growth? So could we see some in the second half of 2023, or do you think it's more likely that they will rebound from a marketing point of view in 2024?”
Read says he doesn’t have a crystal ball.
"We're sort of at a unique point where growth has slowed,” he says. "The companies have driven their share price by rebuilding margins.
“There's an article in the FT today that talks about the number of new products being launched, but technology companies are not entirely clear on what the business model is associated with that.
“And that very much bears in line with the conversations I've had with these companies around product innovation.
“So I would expect that to revert. But I think that we're rightly being cautious about the likelihood of that happening in the course of this year.
“Now these clients haven't totally stopped spending. It's really that they pulled back and I don't think that that will continue forever.”
A slide from the analyst presentation:
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