WPP PLC (LON:WPP) cut its full-year guidance for the third time this year alongside a drop in like-for-like third quarter revenue as its clients trimmed advertising spend.
The advertising giant said like-for-like sales growth and operating margin would both be flat for the year, compared to its previous expectations for increases of 1% and 0.3% respectively.
READ: Morgan Stanley sees “no early redemption” for advertising giant WPP, with the third quarter looking tough
Like-for-like revenue in the third quarter fell 2.0% after a 0.8% decline in the second quarter as some of the biggest advertisers, such as Unilever and Procter & Gamble, cut their marketing campaigns.
WPP blamed the “new normal of a low growth, low inflation, limited pricing power world” that has prompted firms to reduce costs.
It added that management consultancies have been telling clients to cut spending.
Facebook and Google not a threat
The company acknowledged the competition the industry faces from online search engines and social media, including Facebook and Google, which account for about 75% of digital advertising and 30% of total advertising.
However, the group insisted that Facebook and Google were not a threat to the business and in fact invested heavily in both platforms.
Third quarter revenue increased 1.1% to £3.65bn on a reported basis but constant currency revenue edged down 0.4%. Constant currency net sales rose 0.9% but fell 1.1% on a like-for-like basis.
The UK generated like-for-like revenue growth while North America slipped back.
WPP adjusts to change
WPP said in order to adjust to the changing industry, it would increase its "focus and urgency" in implementing a “four-pronged strategy of horizontality, fast-growth markets, digital and data”.
“Our prime focus remains on improving revenue and net sales growth, capitalising on our leading position in horizontality, faster growing geographic markets and digital, premier parent company creative and effectiveness position, new business and strategically targeted acquisitions,” the group said.
“At the same time, we will concentrate on maintaining our operating margin, by managing absolute levels of costs and increasing our flexibility in order to adapt our cost structure to significant market changes.”
WPP's long-term targets include an improvement in the net sales margin of 0.3 points, excluding the impact of currency, along with an annual headline diluted earnings per share growth of 10% to 15% per year.
Shares fell 0.69% to 1,288p in morning trading.
Margin guidance a 'negative surprise'
Liberum said while the cut to full year estimates was expected, the margin guidance was not and believes this was driven by signs that higher margin ad-hoc project work in the fourth quarter might not be arising.
“The negative surprise is that WPP is now forecasting broadly flat margins on a constant currency basis vs its previous 30bps increase target, which it had kept through the previous two top-line downgrades stating that its efficiency savings would allow margins to expand,” the broker said.
“Our reading of that it reflects the weakness in North American revenues, which is the highest margin geographical area and that management is not confident about higher-margin ad-hoc project work coming through in Q4, an issue that has been flagged by Interpublic (NR).”
However, the broker added that the third quarter net sales performance was better than forecast. It repeated a 'buy' rating and target price of 1,865p, saying it remains "positive on the longer-term fundamentals but sentiment is likely to be subdued until WPP can stop the downgrade cycle".