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WPP puzzling their revenue figures

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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WPP puzzling their revenue figures

#268385

Postby TheMotorcycleBoy » December 1st, 2019, 4:00 pm

Hi folks,

I've been researching WPP just lately mainly as an income / value play, since:

  1. They could be undervalued right now
  2. They may in the process of a recovery
Initial valuations and metrics
Full analysis aside for now, based on the last full year, but today's SP of £10, we have:

  • P/E 11.8
  • P/Sales 0.81
  • P/Book 1.29 (including intangibles and goodwill)
  • DY 6%
  • Dividend cover 1.4
In addition to the above I've also run the numbers of several of the recent FYs (2013-2018), and estimated the following valuations:

  • Discounted Cash Flow initial growth 2.00% final 2.00% terminal 2.00% discounted @ 8.91% = 16.66
  • Discounted Cash Flow initial growth 5.50% final 3.00% terminal 2.20% discounted @ 7.21% = 24.66
  • Earnings power value @ 8.91% = 14.17
  • Earnings power value @ 7.21% = 17.26
  • Discounted dividends growth 3.00% @ 8.91% = 10.46
  • Discounted dividends growth 5.00% @ 7.21% = 28.50

Note that my estimates for DCF tally up reasonably well with SWSs.

My very limited attempt at the recent back story
Despite the good signs above, my enthusiasm re. opening a position is tarnished by several factors. The share price fell quite drastically from about £19 in February 2017 to about £8 early this year. Notable explanations being OM has fallen from 14.3% to 9.17% from FY 2016 to 2018. Cash conversion has also fallen. Furthermore the company doesn't have particularly good ROCE, tangible BV is negative. I don't know the full story, but my guess is that several acquisitions haven't paid off too well. The name "Kantar" comes up. Apparently they are in process of disposing of this, and are/have been making other significant. Sometime between 2017/2018 a new CEO Mark Read has appeared, and a comparision of the layouts of ARs 2013-2017 with AR 2018, reveals a definite rebranding. But what the hell I think, I'm looking at this from the perspective of a small punt on income and value - what could go wrong? Lots, since it seems that this firm has on through a lot of upheaval of late.

Hmm. However the last full year was for year ending 31st December 2018, and given that a lot has probably changed in the firm since then I decided to squint intently at any kind of Interim, Quarterly, HY I could find.

Inconsistencies in reporting revenues across quarterly and interim updates
This kind of company (advertising and PR apparently) certainly is new to me to attempt to analyse. First of we have the "billings and revenues" puzzle. If you check out the first set of figures from FY18 prelims, then you can see these 2 terminologies. I did some brief research, and basically, so it seems, these types of firms hold "client accounts" for their customers and so the figure for any particular client's "billing" is the size of that client firm's budget with WPP. WPP won't have spent all of that money, but presumably it represents some kind of projection of the client future expenditures. So this is lot higher than the "real" revenue figure, that being the figure that WPP has actually invoiced the client for. The next puzzle is that of "revenue" vs. "revenue less-pass through costs". This occurs because usually a portion of the revenue acquired from a client almost immediately goes back out of the door, to pay for a service e.g. network fees. There seems to be much debate thus, as to which bit is revenue and which is an expense etc. After reading about this I'm inclined to stick to the raw (i.e. the larger) of the revenue figures in my estimates/calculations.

However even now that I'm quite clear about these slightly different top line categorisations, after spending sometime puzzling over their last few interim and quarterly results I'm becoming increasingly dubious of the clarity/accuracy of their revenue announcements. Basically I'm looking for growth, albeit small, but some signs that they turning the decline around. So I end trying to reconcile the Q3 of 2019 with earlier revenue announcements. I've tabulated the part of this announcement's Revenue Analysis (second table) right here:



As you can see revenue growth is against "as reported", "at constant currency", and "like for like". Whilst the 5.2% apparent reported rev. growth for Q3, and the lower 1.9% at CCurr seem reasonable, I decided the trace through several of the last announcements, focussing solely on reported revenues figures and see if I could confirm the kind of % growth rates which WPP themselves state. Needless to say my initial attempt to replicate these figures ended with disappointment. I've since rechecked and found several discrepancies:

For example in the published Q1, the reported revenue for that period is stated as £3,588M
https://www.investegate.co.uk/wpp-plc-- ... 00081709X/

However reported revenue is restated for Q1 in Q3's revenue analysis tabel as £2992M
https://www.investegate.co.uk/wpp-plc-- ... 00044863I/

For a while I suspected foul play. But now when I inspect the superscripts and follow the referring notes I see the following:

[1] As a result of the Board's decision on 12 July to enter into an agreement to sell 60% of Kantar, Kantar is now categorized as an "asset held for sale" in accordance with IFRS 5: Non-current assets held for sale and discontinued operations. Accordingly, the Third Quarter Update reports revenue and revenue less pass-through costs, on a geographic and sector basis, excluding Kantar. 2018 comparators have been restated to exclude Kantar. For transparency, we will continue to report results both including and excluding Kantar until FY 2019.

[2] Continuing operations

In other words, the smaller "reported revenue" figures in the Revenue Analysis are restated such as to attempt to remove Kantar's contribution. Sound about right. Assuming this conclusion is correct it looks as if the sold-off portion (i.e. the Kantar bit) accounted for about 15% of total WPP revenue.

I would be interested to hear from any others about WPP, and/or about the disposal of Kantar and it's impact on the financial statements.

Matt

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Re: WPP puzzling their revenue figures

#268387

Postby scrumpyjack » December 1st, 2019, 4:10 pm

I'm not a holder but I thought the basic issue with WPP is to what extent will agencies like them be squeezed out as more and more advertising is directly purchased from Google, Facebook etc.

I guess you have to take a view on that to decide what the long term future for WPP is

TheMotorcycleBoy
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Re: WPP puzzling their revenue figures

#268400

Postby TheMotorcycleBoy » December 1st, 2019, 5:05 pm

scrumpyjack wrote:I'm not a holder but I thought the basic issue with WPP is to what extent will agencies like them be squeezed out as more and more advertising is directly purchased from Google, Facebook etc.

I guess you have to take a view on that to decide what the long term future for WPP is

I see what you mean.

I understand that google and FB will rent out the space to render the ads.

However don't the advertising agencies themselves, add the creativity to the campaigns. i.e. the graphics, the slogans, analyse the market places etc.

IOW I thought the AAs did add some value in this way? But I have to say I know little about how the whole thing operates TBH.

Matt

TheMotorcycleBoy
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Re: WPP puzzling their revenue figures

#268403

Postby TheMotorcycleBoy » December 1st, 2019, 5:29 pm

Ok so I think that part of what is happening is that since Google and FBook own so much of the digital ad space, the likes of WPP (and their competitors) are actually clients themselves of G and FB:

WPP Spent More Than $7 Billion On Google And Facebook This Year
WPP, which reduced its full-year forecast Tuesday following a disappointing Q3, said it had invested mre than $7 billion on Google and Facebook this year as the No. 1 and No. 3 destinations for its clients’ media spend.

NewsCorp., Twenty-First Century Fox, Sky and Foxtel all tied as the second-largest destinations for client spend.

By comparison, WPP spent between $750 million and $2 billion with traditional media owners this year, said CEO Martin Sorrell on the company’s earnings call. Just five years ago, Google was the fourth-largest destination for WPP’s media investment, and Facebook was 28th.

Sorrell alluded that spend on Facebook is ramping up significantly.

“Maybe Facebook will move up to [second place],” Sorrell said. “They’ve become a big destination for us.”

Despite increased spending on the platforms, Sorrell said Google and Facebook aren’t eating WPP’s lunch by working directly with clients because they’re focused on the “long tail” of small businesses, while WPP is focused on large, multinational clients.

In terms of WPP’s financial performance, the holding company reduced its growth outlook to flat for the year due to mounting pressure from zero-based budgeters and cost-cutting clients driven by activist investors. Third-quarter revenue grew 0.8% YoY to $4.7 billion. Revenue for the first nine months of the year was flat at $14.1 billion.

“[Activist investors] are making acquisitions with a significant focus on cost,” he said. “When they take 1% positions in their target companies, the reflex action is to cut spending. We are seeing significant impacts on packaged goods companies in result of their activities.”

And that pressure is spreading internationally.

“Cost pressure has extended beyond the shores of the US, even to relatively faster-growth markets,” Sorrell said. “A number of multinational managers, for example, in China say they don’t have enough flexibility within the system to compete against local competition.”

To facilitate client needs in a pressured environment, WPP is consolidating agencies, putting together cross-agency teams with top talent and growing its digital and data investment management services. Sorrell said the industry has too many agencies, which makes for tough competition among agencies willing to “win at any promise.”

“Clients want the best people working on their business; they don’t particularly care which verticals they come from,” Sorrell said. “There we see opportunities, not in terms of revenue growth, but margin growth because it enables us to be more efficient as well as produce better work.”

Sorrell dismissed management consultancies as a competitive threat, but acknowledged they put pressure on WPP’s business by convincing clients to cut marketing spend to save costs.

“There are some wild estimates as to what the digital revenues of consultancies are,” he said. “The consultant inroads are more around their interactions with client CEOs where they say, ‘You’re spending too much, we’ll audit your spending and take a fee based on a contingency or success basis.’”

https://adexchanger.com/agencies/wpp-sp ... book-year/

So maybe my last post was right: the AAs have the artists and the IP to put together the campaigns, but FB and Ggl can take a cut on that creativity since their effectively own the media space.

Matt


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