WPP Earnings: Cost-Cutting in Technology Sector Pressuring Ad Spending, but We Expect a Turnaround

While WPP WPP posted organic growth in the first half, the results were disappointing due to the decline in ad spending by technology clients in the U.S. in the second quarter, the impact of the loss of the Walgreens account, and like its peers, the slowdown in spending on digital transformation. Lower spending in the technology, media, and telecom sector affected WPP more than its peers, given the firm’s higher exposure. For these reasons, the firm reduced its full-year organic growth guidance to 1.5%-3% from 3%-5%.

In our view, hesitancy by WPP clients in those sectors is temporary as many of the larger companies have implemented cost-control strategies due to economic uncertainties, which we believe are diminishing. Future marketing, the commercialization of AI-based products by technology firms, the lapping of the Walgreens account loss, strong net new bookings, and lower chances of a recession in the U.S. mean WPP organic growth will likely accelerate in 2024. Regarding the bottom line, we were pleased with the limited impact of the weaker growth on the adjusted operating margin.

We are maintaining our GBX 1,340 fair value estimate and view the shares as attractive.

Net revenue during the first six months of 2023 increased 5.5% from last year, with 2% organic growth (1.3% in the second quarter), and tailwinds from acquisitions and foreign exchange. While other regions posted growth, organic revenue declined 1.2% (down 4.1% in the second quarter) in the North America market due to lower spending by technology, media, and telecom clients in the U.S. to which WPP has more exposure (24%) than IPG (15%), Omnicom (12%), and Publicis (12%). However, the decline was mainly due to lower spending on creativity, as media buying in the U.S. increased by around 4.5%. Net revenue in the U.S. from the retail sector also declined, given WPP’s loss of the Walgreens account to Publicis. WPP’s strongest-performing sectors were consumer packaged goods (up 15.1%) and travel (up 8.9%).