WPP's Q1 Revenues Rise YoY - Analyst Blog

Advertising and communication services provider WPP plc (WPPGY) reported strong results for first quarter 2014 with year-over-year improvements in revenues and margins. Revenues increased 1.5% to £2,570 million ($4,252.8 million) in the reported quarter with like-for-like and inorganic growth of 7.0% and 2.6% respectively, partially offset by an 8.1% decline from currency translation effects.

The company recorded healthy like-for-like revenue growth in all regions and business sectors, primarily driven by solid performances in North America, the United Kingdom and Asia Pacific, Latin America, Africa & the Middle East and Central and Eastern Europe, and in the Advertising and Media Investment Management segment.  

Revenues by Region

During the quarter, revenues in North America climbed 3.4% year over year to £915 million ($1,514.1 million) on a reported basis. The surge in revenues was led by strong performance from the company's advertising and media investment management, and the healthcare and specialist communications businesses.

Revenues in the U.K. improved 12.2% to £357 million ($590.8 million), driven by a healthy rise in advertising and media investment management business as well as direct, digital and interactive businesses, partially offset by a decline in branding & identity.

Revenues in Western Continental Europe remained flat year over year at £592 million ($979.6 million) with a relatively solid performance in Finland, Germany, Ireland, the Netherlands and Turkey, negated by Austria, Belgium, Greece, Italy, Spain and Switzerland.

In the Asia Pacific, Latin America, Africa, the Middle East and Central and Eastern Europe, revenues were down 4.1% year over year to £706 million ($1,168.3 million) on a reported basis, driven largely by weaker performances in Greater China, Malaysia and Japan.

Revenues by Segment

By segment, Branding and Identity, Healthcare and Specialist Communications reported revenues of £703 million ($1,163.3 million), rising 1.8% year over year on a reported basis and 9.1% in constant currency. All of the businesses in this sector, except Branding & Identity, were up in the quarter with a particularly strong growth in the direct, digital and interactive businesses.

Revenues from Advertising and Media Investment Management improved 5.5% to £1,089 million ($1,802.1 million) on a reported basis. It was the strongest performing segment in the reported quarter. The segment gained a total of £797 million ($1.275 billion) in net new business wins (including all losses) in the quarter, compared with £940 million ($1.504 billion) in the year-ago period.

Data Investment Management's revenues decreased 3.8% year over year to £566 million ($936.6 million). Although there was a marked improvement in the United Kingdom, Latin America and Africa, the weakest sub-sector continued to be the custom businesses in both the United States and Canada, where discretionary spending remained under review by clients.

Revenues from Public Relations & Public Affairs declined 4.1% year over year on a reported basis to £212 million ($350.8 million) as WPP faced headwinds in Latin America and the Middle East.

Margins

Gross margin grew 3.8% and 6.1% on a like-for-like and constant currency basis, respectively, with continued improvement across all geographies and sectors. On a like-for-like basis, Advertising and Media Investment Management and Branding & Identity, Healthcare and Specialist Communications (including direct, digital and interactive) were the strongest performing sectors along with Public Relations & Public Affairs.

For full year 2014, WPP expects like-for-like revenue and gross margin growth at well over 3% each compared with 2013.

Balance Sheet & Cash Flow

Free cash flow for the twelve months ended March 31, 2014 was £1.5 billion ($2.5 billion), of which the company utilized £1.2 billion ($2.0 billion) for acquisitions, share repurchases and dividends.

Average net debt decreased 19.7% year over year to £2.454 billion ($4.06 billion), reflecting the continued improvement in working capital and lesser acquisition spends.

WPP repurchased 14.0 million shares at an average price of £12.38 ($20.49) per share during the quarter. The company raised its share buyback target to 2%–3% of share capital in 2014 from the existing 1%. The targeted dividend payout ratio in 2014 is 45%.

Acquisitions

WPP completed 20 acquisitions worldwide across all spectrum of its business in first quarter 2014. Of these, 13 acquisitions and investments were made in new markets and 16 in quantitative and digital. These include acquisitions and increased equity stakes in Advertising and Media Investment Management in France, the Netherlands, Poland, Russia, the Middle East, South Africa, China, India and Vietnam; in Data Investment Management in the Kingdom of Saudi Arabia and the United Arab Emirates; in Public Relations and Public Affairs in China; in direct, digital and interactive in the United States, the United Kingdom and China.

Outlook

With sustained revenue growth in faster growing geographic markets, strategically targeted acquisitions, and continued emphasis on improvement in operating costs to enhance margins, WPP expects to continue its growth momentum in 2014. The company expects above-industry-average revenue growth due to its geographically superior position in new markets and functional strength in new media and data investment management, including data analytics and the application of new technology. WPP expects operating margin improvement of 0.3 margin points in 2014 on a constant currency basis, with like-for-like revenues increasing over 3%. With slightly stronger global GDP growth forecasts of around 3.6% and events like the Winter Olympics at Sochi and the FIFA World Cup in Brazil, we see WPP as well poised.

WPP currently carries a Zacks Rank #3 (Hold). Other stocks in the industry that look promising and are worth looking into now include The Interpublic Group of Companies, Inc. (IPG), Lamar Advertising Co. (LAMR) and Publicis Groupe SA  (PUBGY), each carrying a Zacks Rank #2 (Buy).

Note: £1 = $1.6548 (period average from Jan 1, 2014 to Mar 31, 2014)