WPP lowers guidance after US tech slowdown

Pride comes before a fall, and WPP (WPP) has learnt this the hard way. The world’s biggest advertising agency reassured shareholders in February that brands were still investing in marketing, and that like-for-like sales growth would be between 3 and 5 per cent in 2023. 

Six months down the line, however, and WPP has cut its guidance to 1.3-3 per cent. The main issues have been US technology clients and delays in tech-related projects. Organic sales from North America fell by 2.1 per cent in the second quarter of 2023, meaning regional revenue edged up by just 0.4 per cent in the half. WPP’s update follows a profit warning from S4 Capital (SFOR), which is also struggling with cautious tech clients.

At WPP, China’s recovery was also weaker than expected, and strong growth in the UK wasn’t enough to keep the group on track. 

But Top-line growth isn’t the only challenge facing WPP. Reported profit before tax plunged by 51 per cent to £204mn in the period. A whopping £360mn of adjusting items were largely to blame, following attempts to reshape the business. These included £87mn of IT restructuring costs and £180mn of lease impairments. Adjusting items are expected to reach £400mn for the full year.

WPP’s large debt pile didn’t help things, either. As of 30 June, adjusted net debt – which excludes lease liabilities – sat at £3.5bn, up £300mn year on year. Total finance costs jumped by 59 per cent to £231mn as a result, although some of this was offset by higher interest earned on cash. 

All eyes are now on the group’s work pipeline. Management reported $2bn (£1.57bn) of net new billings in the first half of 2023, with the pipeline of potential new business “larger than at the same point in 2022”. This is a high number, but is 41 per cent lower than last year, and a third lower than pre-pandemic levels. 

Shares in WPP fell by 7 per cent after its half-year results was published, and the group now trades on a forward price/earnings ratio of eight, compared with a five-year average of 9.8. The immediate outlook is clearly not good for ad agencies, and WPP has a lot of challenges ahead, but brighter times are hopefully around the corner. Hold. 

Last IC View: Hold, 1,054p, 23 Feb 2023