BARCELONA Fierce competition in the global advertising industry forced Britain's WPP (WPP.L) to lower its profit guidance for 2014 on Thursday, wiping more than a billion pounds off its share price and overshadowing its improving trading throughout 2013.
The world's largest advertising group said it had outperformed the rest of the industry in winning new business but the combination of clients demanding more for less, and currency fluctuations had hit its operating margins on a reported basis.
The company's operating margin for 2013 rose 0.3 margin points to 15.1 percent, below its annual growth target of 0.5 points, while it lowered its outlook for 2014 target to 0.3 margin points growth.
The forecast for this year also excludes the impact of currency swings, which could still take a heavy toll on a group that, led by Martin Sorrell, expanded early in emerging markets which have proved highly volatile of late.
In the final quarter of 2013, when approximately 40 percent of WPP's profits were earned, sterling strengthened against many currencies by 10 to 20 percent in key faster growth markets such as India, South Africa and Brazil.
"All in all, 2014 looks to be another demanding year, as a strong UK pound and weak fast-growth market currencies continue to take their toll on our reported operating margins," said Sorrell, who has built WPP into one of Britain's biggest companies during his 28 years at the top.
"We have the same (long-term margin) target, it will just take us longer to get there. The reason is pressure from clients in terms of they want more for less, and a lot of competition and competitive discounting in media pricing."
The disappointing profit outlook overshadowed the group's overall trading in terms of the main industry metric - like for like revenue growth - which rose 3.5 percent in 2013, in line with forecasts. It was up 5.7 percent in January.
WPP had traded well in the second half of the year, winning new work and taking advantage of the $35 billion merger of its two biggest rivals, Omnicom (OMC.N) and Publicis (PUBP.PA), which will make them the largest ad group in the world once the deal closes.
The British firm recorded a 57 percent jump in net new business billings, reflecting how it has poached blue-chip firms from the soon-to-be American-Franco supergroup, which faces conflicts of interest amongst its combined client base.
Liberum analyst Ian Whittaker said the lowering of the margin target would give WPP more scope to respond to the increasing pressures in the industry.
"We think WPP has done the right thing in admitting this and reducing its guidance in one go, but it does introduce the question of structural risk into the agencies' story," he said.
WPP was the last major ad group to report its results. Publicis, led by Sorrell's sparring partner Maurice Levy, reported a slowdown in trading in the fourth quarter, while Omnicom ended the year well.
WPP shares, which had risen over the last month, fell 6 percent, wiping just over a billion pounds off its shares and cutting market capitalization to 16.8 billion pounds, as analysts said the revised guidance would hit expectations for 2014 earnings per share.
Shares in Publicis were down 1.4 percent.
"Something of a mixed bag at first take," Jefferies analysts said. "All in all, a creditworthy print, though perhaps not enough to keep the bulls happy. We see value here but the stock may give something up in the short term."