WPP WPP PLC

By Nick Kostov 

WPP PLC shares tumbled 12% Thursday after the company logged its worst year since the financial crisis and forecast no growth for 2018, a further sign of the heavy toll of advertising's digital revolution.

The world's largest ad company said it is setting budgets this year on the assumption that both revenue and net sales will be flat. For 2017, net sales were down 0.9% on a like-for-like basis, against a forecast they would be "broadly flat."

The company said it is simplifying its unwieldy structure, accelerating its development from a group of individual companies to a "cohesive global team."

Like other big ad firms, WPP is grappling with the slowest revenue growth since the financial crisis as previously big spending consumer-good companies keep a tight lid on marketing budgets. That slowdown in growth has pressured agency holding companies to revamp an organizational structure that has gone out of style.

"There are two things going on: technological change, and the second is short term pressures, whether it be zero-based budgeting, activists or private equity," Mr. Sorrell said in an interview with The Wall Street Journal.

"We're clear on the destination," Mr. Sorrell said. "The changes that are taking place are pushing us to do it faster."

Big ad firms built their businesses over the years by acquiring different specialists with their own ways of working and separate finances. Now there has been a move across the industry to align the different agencies closer together to allow clients to better access resources across their groups and cut costs. WPP executives often refer to its approach as "horizontality."

The company, which owns creative and media agencies such as J. Walter Thompson and Ogilvy & Mather, reported a 1.3% decline in fourth-quarter organic net sales, a closely watched metric in the industry that excludes currency effects and acquisitions. That growth rate was below analysts' expectations of a roughly 0.7% rise.

In the fourth quarter, organic net sales were down 3.4% in North America, declined 2.6% in Western Continental Europe and dropped 3% in Asia Pacific. The bright spot was the U.K., which rose 9.1%.

WPP's closest competitors have been facing similar headwinds. France's Publicis Groupe SA posted organic growth of just 0.8% last year, while Omnicom Group Inc. posted lackluster fourth-quarter revenue, blaming a pullback by marketers on project work, losses at some independent-branded agencies and softness in its programmatic business.

Omnicom's longtime CEO, John Wren, said he expects the company to post softer organic growth this year compared with 2017 because of challenges in the marketplace like changes in technology, shareholder activism and new competitors.

The overall outlook for Madison Avenue remains cloudy. Ad companies are dealing with major slowdowns in industries that they have long relied upon for growth, such as consumers-goods giants and retailers. Those sectors are putting additional pressure on ad firms to reduce the fees they pay for services.

The slowdown in advertising spend has affected agency sector organic growth, which has slowed from 4.5% in 2015 to 1.9% in 2016 and to an expected 1.1% in 2017, UBS analysts wrote in a note this week.

In their note, the analysts cited a long list of challenges that the sector is facing, including marketers experiencing slower growth, companies continuing to cut the fees they pay agencies, and growing competition from consulting firms. Another challenge has been brands cracking down on nontransparent practices in the ad-buying sector, which industry observers say has squeezed holding company margins.

Write to Nick Kostov at Nick.Kostov@wsj.com

(END) Dow Jones Newswires

March 01, 2018 04:17 ET (09:17 GMT)

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