Results season has got off to an alarming start in the advertising industry, but investors shouldn’t get the wrong message.
A major growth warning from French communications giant
Groupe probably doesn’t mean the traditional ad business is any more challenged by the likes of Google and
than it was already known to be. Instead, the setback underlines the sheer difficulty of taking a big analog company into the digital age—particularly when big acquisitions are involved.
Paris-based Publicis, which owns traditional agencies such as Leo Burnett and Saatchi & Saatchi as well as digital-ad businesses like Sapient, dramatically lowered its growth outlook late Thursday. Revenue will shrink by 2.5% this year, stripping out currency and portfolio changes, and “if current trends persist” it could shrink as much as 2% next year, the company said as it reported weak third-quarter results. The stock fell about 14% Friday morning.
The weakness was concentrated in the company’s U.S. business, which accounts for well over half of revenue. Revenue from North America in the first nine months was 3.3% lower than in the same period last year, excluding the impact of currency and the $4.4 billion acquisition of data company Epsilon, which closed at the start of the second half.
Publicis still gets 37% of its traditional advertising revenue from consumer-goods companies and retailers, which are reducing spending on branding as they find new ways to reach consumers, often involving Silicon Valley ad platforms. A second problem was that Publicis has lost accounts over the past year in its media business, which places ads on TV networks and online on behalf of advertisers.
Finally, Sapient—a U.S. consulting firm Publicis bought in 2015 and has made the centerpiece of its own digital transformation story—isn’t performing well in its home market. Publicis is trying to refocus the U.S. Sapient business away from project-based work toward longer-term “business transformation” programs. The transition seems to be bumpy.
Most of these problems are somewhat specific to Publicis, though. Even advertising’s shift from analog to digital doesn’t yet seem to have hit the U.S.-listed agency holding companies,
anything like as hard as it has WPP and Publicis in Europe.
Omnicom and IPG reported organic revenue growth of 2.7% and 4.6% respectively in the first half. WPP stock fell 3% in sympathy with Publicis Friday, which may prove an overreaction.
Still, the issues at Sapient in particular will magnify investors’ doubts about Publicis’s direction—particularly the aggressive acquisition strategy it has pursued to embrace tech and counteract the decline of traditional advertising. The company already booked a roughly $1.5 billion write-down against Sapient and another U.S. acquisition, digital agency Razorfish, in 2017.
Epsilon—the company’s largest ever deal—wasn’t performing well when Publicis bought it as its big data play and still isn’t.
The irony of the situation is that Publicis wants above all to help disrupted companies with their “digital business transformation.” That gives it all the more reason to get its own transformation story right.
Write to Stephen Wilmot at email@example.com
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