The beauty of the quarterly reporting season is that, just as you finish one season, the next one soon arrives. Next week, we start to see the results coming from the groups, with Omnicom starting the season off. What are we likely to see from the different groups on what they say for Q2?
It is worth recapping what happened in Q1. The underlying theme was divergence between the groups. On the one hand, we had Publicis which once again led the field in Asia-Pacific with organic revenue growth of +4.8%, powered by continued strength in Southeast Asia. Omnicom posted organic revenue growth of +6.0% for APAC but unlike others still includes pass-through costs so was more like 3.5% to 4% on a like for like basis, which was still good.
For the other groups, things were more difficult. WPP saw another sharp decline in Asia-Pacific, with organic like for like revenues were down 5.7% in the region. The drag here was China, which saw like for like revenues fell 17.4% YoY. For Dentsu, it was a tale of two geographic performances, with Japan strong with 5.5% organic revenue growth but the rest of the region down 4.6%. IPG meanwhile saw a 9% drop in organic revenue growth.
How will Q2 fare? Luckily, I no longer must prepare quarterly forecasts as part of my role so I am spared the task of forecasting each region for each of the holdcos but I think we will see some general patterns.
First, I think we will see a continued divergence in performance. That is a risky thing to say given quarterly numbers can always be impacted by issues such as account losses, especially on a regional level, but I would still expect Publicis and Omnicom to be the better performers. As I have stated previously, the diverging performance between the agency holdcos looks increasingly structural rather than cyclical and both groups – particularly Publicis – have managed the transformation of their businesses well.
Conversely, I do not see much relief for either WPP or IPG. For WPP, the main issue again remains China, where the management have indicated that revenue is expected to remain depressed into the second half of the year. WPP’s issues in China have now been going on for nearly two years and, when it lasts so long, a turnaround becomes both increasingly difficult and longer to execute. For IPG, the continued uncertainty around the merger with Omnicom is likely to weigh on its operations (as it would do with any business). Dentsu is perhaps a more interesting case. Japan is likely to again be resilient and there are signs that its Asia-Pacific business ex-Japan may be showing better trends than expected. Let’s see.
By practice, expect media to continue to be the standout as it was in Q1. Publicis saw double-digit growth and Omnicom performed well. Even groups that reported a weak Q1 performance had bright spots in their media operations. Ex-Japan, Dentsu showed mid-single digit revenue growth in its Asia-Pac operations while WPP Media (I was about to write Group M – RIP) showed growth in places like India, with 5.5% organic revenue growth. Creative is likely to see a mixed performance but expect technology to continue the weak trends of Q1 – there seem no underlying reasons why there should be a marked shift in performance in Q2.
Finally, by geography, I would still expect China to be difficult for most – but not all – of the agency groups in Q2. Publicis did have a strong Q1 in the country, suggesting they are taking significant share especially given WPP’s and Dentsu’s double digit declines. I think we will see two aspects to China’s performance. One is general. There are signs western brands are pulling back, consumer confidence remains low, and geopolitical risk is pushing spending elsewhere. The second is holdco specific. Publicis clearly has momentum. If that continues, that could be a crisis for WPP, especially as China’s revenue slump has become a significant drag on group-wide performance.
So, expect Q2 to look very much like Q1. However, there is one other major point. There is little to suggest the agency holdCos will see APAC as a major source of growth any time soon. WPP is the most exposed to the region – China and India are two of its five top markets – but, even here the region represents probably only 15%of revenues. For the other agency holdcos, the exposure is even less. Hopefully, that will change.
As always, this is not investment advice.
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