PARIS — Shares in some of the world’s biggest ad companies tumbled Thursday after Publicis Groupe SA reported revenue below expectations, heightening investor concerns over the advertising giant’s ability to weather technological disruption.
As with its rivals, the world’s third-largest advertising group is under pressure from increased competition from consulting firms, marketers cutting back on the fees they pay ad agencies and changes in consumer behavior.
Publicis has responded to industry challenges by trying to transform from a corporate Goliath — beset by rivalries among its creative and digital agencies — into a more nimble operation that can cater to clients who are demanding services to contend with disruptions to their business models. The shift has yet to convince investors, however, and its share price is now down around 16% over the past year.
"The market wants tangible proof of our transformation," Chief Executive Arthur Sadoun said.
Publicis, which owns agencies including Leo Burnett and Saatchi & Saatchi, said revenue in the quarter ending on June 30 fell 2.1% on an organic basis — a key industry measure that strips out currency effects, acquisitions and disposals — to 2.2 billion euros ($2.56 billion). Analysts had been expecting a 1.1% rise in second-quarter organic revenue.
Net income for the first half decreased 19% to EUR313 million compared with the same period a year ago.
Publicis’ results rattled investors and shares fell as much as 9%. Its woes ricocheted, hitting shares of the ad industry’s biggest company, WPP PLC, which fell by more than 3%.
The market has already punished ad-holding firms this week: Rival Omnicom Group Inc.’s shares tumbled more than 9% Tuesday after the advertising giant missed its second-quarter sales estimate because of lackluster performance in North America.
Omnicom’s numbers "reminded investors that rather than climbing out of a hole to see daylight, agencies may be sinking further underground," Michael Nathanson of research firm MoffettNathanson said in a note on Wednesday.
Organic revenue at Publicis fell 2.3% in North America in the second quarter, hurt by an underperformance of its business serving health-care clients. In particular, Publicis Health Solutions, a business that involves sales people visiting doctors to sell products, was responsible for a EUR30 million revenue drop in the half, Mr. Sadoun said.
Publicis is now conducting a strategic review of that business, which Mr. Sadoun described as "very volatile, low margin and noncore." It contributed around EUR300 million in revenue last year.
"We hit a bump with that business and it isn’t the first time," Mr. Sadoun said.
Publicis also suffered in Europe, where it was hit by uncertainty around the implementation of new data law. The Paris-based firm suspended business with publishers that couldn’t prove that they were compliant with the new law in the days after it came into force, shaving around EUR10 million off revenue, Mr. Sadoun said.
Despite the company missing analyst expectations, there were bright spots. Operating margin increased by 60 percentage points in the first half to 14.3%, helped by tight cost control. Diluted earnings per share for the quarter was EUR1.94, a rise of 13% on the second quarter of last year.
Publicis will begin to see the fruits of new account wins in the second half, Mr. Sadoun said, adding that he was confident the firm would meet its full-year objective of improving growth and margin versus 2017.
"We know we’ll deliver," he said.
Write to Nick Kostov at [email protected]
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