Sectors: Creative, Media & Technology

WPP boss Mark Read says the holding company’s 2023 figures show it weathered a tough year. However, analysts suggest there are still plenty of questions to be answered about operating models and AI. Despite a “tough year” for much of its agency portfolio and exposure to lower tech client spending in the US, WPP chief executive officer Mark Read says the British holding company has put in “a resilient performance” in its last year in business. WPP, the parent firm behind agency brands such as VML, Ogilvy and GroupM, released preliminary figures for its 2023 commercial performance today (Thursday). The group employs around 115,000 staff worldwide, making it the largest agency employer in the industry. Revenue less pass-through costs, a measure broadly equivalent to net revenue, at the holding company, came to £11.8bn ($14.9bn) – an increase of 0.9% on last year’s performance, in line with previous expectations. But harsh trading conditions meant the group brought in $4.5bn in net new business revenues, down on $5.9bn in 2022. Speaking to The Drum, Read says: “We had two very strong years of growth coming off Covid, and there’s no doubt that 2023’s been a little more challenging for us. A bit like the technology companies, we’ve been in something of a year of adjustment. Maybe, given the strong growth post-Covid, that shouldn’t be surprising.” The earnings report follows an earlier release of figures in January when the firm held a capital markets day intended to entice and reassure shareholders. The company expects revenue less pass-through costs to increase between 0 and 1% this year, while its margin is estimated to increase by 0.2-0.4%. Growth at the group – as has been the case among several of its competitors, including Interpublic Group and Dentsu – was slower last year, partly due to the tech sector downturn. Lower spending in other areas also held back WPP revenues. Revenues from retail clients fell 11.3% compared with 2023, while financial services, healthcare and pharmaceutical client revenues also fell in the fourth quarter of the year. Revenues from WPP’s ‘global integrated agencies,’ which include GroupM, Ogilvy, and AKQA, accounted for 83% of its revenue. But underperformance at key agency brands dragged revenue growth down; without GroupM, that portion of WPP’s business saw revenue less pass-through costs fall for the last three quarters. Wins at Ogilvy – including clients such as H&R Block, Mondelez, SC Johnson and Verizon – were offset by the commercial performance of AKQA and VML. Read says a turnaround in fortunes at the latter shops would depend more on market trends than on operating models. “I don’t think it’s about what one has done well and one has done poorly,“ he says. “Ogilvy has benefited from a strong, creative renaissance… a really good track record of winning new business. VML and AKQA have suffered from their exposure to technology clients, and project-related technology spend has probably hit them a little bit harder than Ogilvy,” he says. “Ogilvy has been a standout performer.”

Questions over AI and restructure scheme

The holding company’s significant cash investments in AI capabilities have already begun to improve commercial performance at VML and AKQA, Read claims. But details beyond what was already unveiled at the firm’s January capital markets event are few and far between. “[AKQA and VML] are benefitting from [the investments] already. We now have 30,000 people across the company using WPP Open, many of whom work at VML and AKQA… we’re seeing benefits already from those programs in terms of our new business performance,” he says. ”It’s still early days to see a long-term impact on the business overall, but we’re absolutely committed to our investments in that area.” Short-term impacts are also unclear. According to Nick Berry, partner at M&A consultancy Green Square, the impact of WPP’s AI investment “isn’t filtering down into the numbers in a tangible way as yet.“ “There isn’t anything specific in terms of job losses or job creation. How is it going to change their engagement with clients? What’s it going to change in terms of their operating model?“ For the meantime, the firm is committed to internal investment in AI, rather than adding expertise through agency acquisitions, Read says. “I don’t know if there’s a path today to really develop your AI business through M&A,” he says. “We were fortunate to acquire Satalia two and a half years ago. I don’t know that there are things available to buy today that would bring us the expertise that that team has been able to bring.” Though WPP’s results fell within predicted ranges, its share price had fallen 4.7% at the time of writing. Berry says that reception stems from expectations among shareholders of better-than-predicted results and the amortization costs of WPP’s VML merger. “They expect surprises. [WPP] has not revised what they think 2024 is going to look like; delivering what was expected gets you hammered. You’ve got to have another story,“ he says. Amortization costs relate to intangible assets – such as agency brands. WPP estimates that the VML and Burson mergers incurred a one-off amortization of £728m ($918m) in 2023, a figure that includes millions of dollars used to buy the companies initially. “That’s £346m of what was spent to buy those brands that has now gone. And they’re the sorts of things that bug the City,“ says Berry. Despite the cost of last year’s big mergers (and the immediate reaction of shareholders), he suggests that a healthier new business plan is a sign that WPP’s plan will eventually pay off, adding: “If that proves to work, and people do find the model is simpler and they pull off some client wins… there’s evidence that the logic behind that is coming to bear.“ Adds Read: “We look at 2024 with optimism. We’ve got great plans around AI. We have a very strong new business pipeline. We’re doing great work for our clients, who are many of the world’s leading organizations. I think there’s tremendous opportunity ahead of us at WPP that we’re determined to capture.” Read more

The Sorrell-helmed holding company’s latest trading update contains little cause for optimism. What does it tell us about the health of the sector at large? Client caution in the face of adverse economic weather will likely persist over the next 12 months, according to Sir Martin Sorrell, executive chairman of Media.Monks parent firm S4 Capital. The agency boss said “we are not expecting 2024 to show macro-economic improvement” in a trading update concerning the company’s commercial performance in the fourth quarter of 2023. Though the company said results were in line with expectations, the update counters some of the optimism expressed by UK ad industry figures, including the IPA’s director general, Paul Bainsfair. “After four years of very strong growth, 2023 was a difficult year impacted by volatile macro conditions and, consequently, cautious spending from clients, particularly those in the technology sector and from smaller project-based assignments,” Sorrell said in a statement. The company said it expects like-for-like annual net revenue to fall 4% and for its operating profit margin to hover around 10-11%. The margin rose on the back of “significant cost reductions” which included hundreds of layoffs earlier last year. Whether or not S4’s Q4 performance will be mirrored by its sector peers is an open question. The fourth quarter of the year is typically lucrative for agencies as clients spend the cash left in their budgets. A recent trading update issued by Mission Group, a smaller British agency network listed on the AIM exchange, bore this out – after issuing a profit warning because of “challenging” commercial performance earlier in 2023, its trading “significantly improved” in the final quarter. The lift available to agencies may only be a small mercy, however. 2023 saw advertisers slash marketing budgets, leaving little scope for commercial growth for agency businesses. “For a significant majority, Q4 was tough,” says Barry Dudley, a partner at advisory firm Green Square. “Q4 was a combination of the cost of living, interest rates, the works. Clients just sat on their hands. But conversations seem to be opening up.” Last week’s IPA Bellwether, a quarterly survey of advertiser confidence, suggested that brand advertisers would look to increase spending on marketing activity over the next few weeks. “This quarter’s upbeat Bellwether findings show that companies are heeding the evidence that continuing to advertise through the tough times can help maintain brand loyalty and protect the long-term health of their brands,” said Bainsfair. “Optimism for this year is high, but there’s nervousness for elections and wars,” adds Dudley. But S4’s client profile – the company prefers to work with tech clients and large multinational advertisers it terms “whoppers” – means that increased spending by British household names is unlikely to provide much benefit. ‘A maelstrom of uncertainty’: My CES chat with Sorrell became an agency survival guide S4’s revenues were hit when technology clients began cutting marketing spend last year. And its ‘tall’ market offering, which eschews additional sectors included in bigger holding company portfolios such as PR or healthcare, means that the company has proven vulnerable to the whims of the US tech industry. “They don’t have that balance of other services at S4,” says Dudley. Sorrell suggested 2024 would not bring a radical change in circumstances for the firm. “While it is early in the year, we are not expecting 2024 to show macro-economic improvement, and client caution on marketing spend will likely persist, although not at last year’s level given interest rates are likely to fall over time,” he said. Given those conditions, Media.Monks’ content pillar, which broadly covers creative and production, had the most scope for growth, he added. “Initial indications are for an improvement in performance in the Content practice, reflecting cost reductions, broadly similar performance in Data & Digital Media to last year and a more challenging outlook for Technology Services. In these unpredictable times, we are focused on positioning the Company for medium-term growth, improving profitability and returning funds to shareowners.” The latter point is an important one for S4 Capital. Its growth strategy in previous years centered on a seductive M&A approach that offered cash-and-share deals to founders. The strategy paid off, and it was able to add companies such as MightyHive, XX Artists and TheoremOne. Now, S4’s share price is considered to be underweight. If it’s to return to its strategic growth plan and fulfil Sorrell’s medium and long-term ambitions it will need to keep shareholders onside and hope its price rises once more. Read more

Some thoughts from a conversation with our partner Barry Dudley and host Peter Lang on getting your business into shape generally and with an eye on maybe doing a deal in the future. I’d skip the first 7.5 minutes where they chat about Barry’s career, but then they discuss: 7:30 Why having strong numbers gives freedom for creativity, innovation, people development 11:30 Simple and timely monthly reporting and a handful of KPI’s 18:30 When is the right time to bring in a CFO 21:00 Getting your numbers into shape, with normalisations, to then look towards a value realisation event 32:00 What makes a good deal – it’s not just about the numbers – and changing deal structures On You Tube Or Spotify