Some Light, but How Long Is the Tunnel?

NEW YORK With the last of the big four ad holding companies, WPP Group, reporting its first-half numbers last week, the bleak picture of 2009 came more fully into view. By key measures such as organic revenue and operating margin performance, the second quarter represented a significant downslide from the first, dashing hopes for a turnaround this year and tempering expectations for 2010.Some holding-company CEOs, such as Publicis Groupe's Maurice Levy and Omnicom Group's John Wren, suggest the worst is past, though they agree that a return to growth will take time and won't materialize until next year. "We should have hit a trough in the second quarter," Wren told industry analysts after Omnicom reported its latest numbers. "It is going to take a couple of quarters before we cycle out of that. And it's going to take a couple of quarters before growth returns."Interpublic Group's Michael Roth and WPP Group's Martin Sorrell seem less bullish. Roth sees incremental margin improvement with "nominal growth" next year, while Sorrell predicts that 2010 will be "even Steven" compared to 2009, despite the low performance baselines from this year.Sorrell's outlook represents a change from last November, when he predicted a flat 2009 and a return to growth in 2010. But in the first six months of this year, compared to the same period in 2008, the U.K.-based company, in dollar terms, saw its after-tax profit fall 59 percent (to $169 million), its revenue slip 3 percent (to $6.4 billion) and its operating margin slide to 7.5 percent from 13 percent. (The margin and profit figures exclude revenue from the minority stakes that WPP holds in agencies such as CHI & Partners.)In an analysts' call on Wednesday, Sorrell indicated that client belt-tightening is continuing and any industry recovery would take time. "In the corporate area, even more than in the consumer area, given the fact that we stared into the abyss six, nine months ago, people are going to take a long time to go back to where they were," Sorrell said. Corporations "are going to be very hesitant to invest until they're ready to believe that the economy is definitely moving ahead."That echoed Roth's sentiments when speaking to analysts last month, after IPG reported a first-half net loss of $53 million on a revenue decline of 16 percent (to $2.8 billion). IPG saw its margin slip to 0.5 percent from 4.3 percent in the same period last year. "Clients continue to be cautious when it comes to committing resources in such an uncertain environment," Roth said. "This is consistent with the fact that the predominant cause of our revenue decline was scope reductions."Sorrell, however, went even further to say, "When people see comments in the press about advertising improving or people suggesting that the worst is over, I'm not sure that is the case. The one caveat is we tend to lag the cycle" of economic recovery.In contrast, Levy is projecting a better second half of 2009, some growth "by the middle of next year" and full-year growth for 2010. And while he acknowledged that 2009 is a "bad year," he told analysts last month that "the worst is behind us. Maybe we can expect a bad July and a bad August. [But] we can definitely expect a better Q3 and a better Q4."In the first half, Paris-based Publicis Groupe, like its rivals, experienced declines in revenue (down almost 1 percent, to $3.14 billion), net income (down 13 percent to $238 million) and operating margin (to 13 percent, from 15 percent in the same period of 2008).As with IPG, the bankruptcy reorganization of major client General Motors played a significant role in Publicis Groupe's decline. Similarly, Omnicom's subpar first-half results -- revenue down 16 percent (to $5.6 billion), net income down 23 percent (to $397 million) and margin down to 12.1 percent from 13 percent -- stemmed in part from the bankruptcy of Chrysler.Of course, with revenues lagging far behind last year, holding companies have shifted into cost-slashing mode, not unlike the clients they serve. Layoffs have become commonplace and are expected to continue in the second half, driving up severance costs, which in turn hinders margin improvement. That said, smaller headcounts could mean greater profitability once client spending rebounds and severance costs abate. WPP, for example, ended July with a worldwide headcount of 105,393, down 7 percent from the end of June 2008.Given the differing outlooks of holding-company bosses, it's hard even for analysts to predict what next year will bring. So much hinges on the overall health of the economy that JPMorgan's Alexia Quadrani isn't sure whether to side with Levy's optimism or Sorrell's skepticism, though she does see signs of improvement.When asked if holding-company growth in 2010 is realistic, Quadrani told Adweek: "I don't think we know yet. What we do know is that pretty consistently it looks like the ad market has stabilized and that the rate of decline has begun to level off. And while Q2 was much worse than Q1, most people are saying that July looked a little better."Despite the air of uncertainty permeating the marketplace, JPMorgan is projecting modest organic revenue growth for the holding companies next year, in the neighborhood of 2 to 3 percent. "But it's our best guess at this point," Quadrani added, "because so much depends on the economy."See also: "WPP Group Suffers First-Half Declines""MDC: Q2 Profit Up Despite Revenue Slip""IPG's Q2 Revenue, Income Plummet""Omnicom Takes Big Hits in Revenue, Profit""Organic Revenue Slides at Publicis"

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Some Light, but How Long Is the Tunnel?

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