Global Equity Research 08 April 2019
Media Advertising 101: A Primer with a Focus on the 2019 Outlook
Comprehensive overview of the advertising industry. In this primer, we Media examine macroeconomic trends, the domestic and international markets, and the Alexia S. Quadrani AC major media that participate in this industry. (1-212) 622-1896 [email protected] An analysis of key industry trends, including: the drivers of slower industry Bloomberg JPMA QUADRANI
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Table of Contents Executive Summary ...... 3 The Advertising Market...... 12 International Trends...... 22 Dissecting Advertising Spending ...... 25 The Advertising and Marketing Services Company ...... 42 Advertising and Marketing Services Company Growth Drivers ...... 52 Industry Trends ...... 57 Compensation Structure...... 66 Financial Outlook ...... 67 Valuation ...... 70 Company Profiles...... 72 WPP Group (Overweight)...... 73 Omnicom Group (Overweight) ...... 78 Interpublic Group (Overweight)...... 83 Publicis Groupe (Neutral) ...... 88 Dentsu (Neutral)...... 93 Appendix I: Billings...... 100 Appendix II: Working Capital Changes...... 101 Appendix III: Glossary...... 102
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Executive Summary
Agencies saw modest 2018 was another volatile year for agency holding company stocks. Despite a modest improvement in organic growth improvement in organic growth for the industry, sentiment remained negative in 2018 following two years of sending valuations to their lowest levels in recent years. The challenges for the deceleration industry and bear case which continue to have momentum include: 1) overcapacity and reduced client conflict have provided greater leverage to clients in terms of both pricing and service; 2) marketers are moving more commoditized functions in-house in an effort to lower costs, sometimes with the help of consultants or ad-tech service firms; 3) client verticals such as FMCG remain under pressure, which is translating into a reduced scope of creative work; and 4) holding companies are burdened by underperforming non-core businesses which they are still in the process of divesting. We dig into each of these deeper below; however, we note that even amid this disruptive environment, we've seen significant divergence in organic growth, with some agencies outperforming and even thriving. This demonstrates in our view that the agency model is hardly broken, and that a well-executed offering can continue to provide substantial value-add to marketers. Furthermore, while creative remains an area under clear pressure, full service agencies are benefitting from stronger demand for media, PR, events, and other marketing services disciplines.
Table 1: Big 4 Agencies Stock Performance vs. S&P 500 & MSCI Europe
Year Big 4 S&P 500 MXEU 2019 YTD -1.4% 12.4% 11.5% 2018 -11.4% -6.2% -13.1% 2017 -17.0% 19.4% 7.3% 2016 9.0% 9.5% -0.5% 2015 7.2% -0.7% 5.5% 2014 2.2% 11.4% 4.1% 2013 53.0% 29.6% 16.4% 2012 21.0% 13.4% 13.4% 2011 -8.6% 0.0% -10.9% Source: Bloomberg. Note: Big 4 is average performance of IPG, OMC, PUB, and WPP.
Agency Organic Growth and Margins in 2018 Aggregate holding company organic growth was 1.6% in 2018, accelerating slightly from 1.1% in 2017, though was still below the 3-4% level reached between 2012 and 2016. Supporting agencies was the best year for ad spend (underlying and reported) since the recession. In contrast to 2017, Q4 project work did not disappoint, and the 1.9% industry organic growth in the quarter was the strongest since Q4'16. Also benefitting the holding companies was a pick-up in public relations: WPP reported PR grew organically 2.6% (up from 0.2% in 2017), while OMC grew 1.8% (from 0.3% in 2017). Meanwhile certain CRM disciplines continued to perform well, including healthcare and experiential; highlighting this trend, we saw improvement at IPG’s CMG segment (3.4% in 2018 from -0.4% in 2017) and OMC's Consumer Experience segment (5.9% in 2018 from 0.8% in 2017). And while no holding company breaks out media separately, management commentary continues to suggest this remains an area of strength.
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Figure 1: Ad Agency Aggregate Organic Growth Historical by Year Figure 2: Ad Agency Aggregate Organic Growth Historical Quarter 7.0% 5.0% 4.7% 6.4% 4.4% 4.5% 5.7% 4.5% 4.2% 6.0% 3.8% 4.0% 3.7% 3.5% 5.0% 4.4% 4.4% 3.0% 2.7% 4.0% 2.4% 3.2% 3.1% 2.5% 2.9% 1.9% 3.0% 2.0% 1.8% 1.8% 1.5% 1.5% 1.2% 2.0% 1.6% 0.9%1.0% 1.1% 1.0% 0.7% 1.0% 0.5% 0.0% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Company reports and J.P. Morgan estimates. Note: Total includes IPG, OMC, WPP, Source: Company reports and J.P. Morgan estimates. Note: Total includes IPG, OMC, WPP, PUB, HAV, MDCA (from Q1’12; excludes ACCENT), and Dentsu Aegis Network (from Q4’14) PUB, HAV, MDCA (from Q1’12; excludes ACCENT), and Dentsu Aegis Network (from Q4’14)
By region is a slightly different story though. In North America, industry growth, measured as an average of the major holding companies, remained flattish for the second straight year, while International markets improved to +3.1% (from 2.1% the year prior). While this gap could be partly explained by ad spend growth and cyclical events (the World Cup has a larger impact in Europe and Latin America), we mainly attribute the difference to the headwinds cited above, which are more prevalent in the U.S. Looking at specific international regions, Latin America, Europe, and APAC saw notable improvement over 2017.
Figure 3: Holding Company Organic Growth by Region - 2018 Figure 4: Holding Company Organic Growth by Region - 2017 2018 2017 Region IPG OMC WPP PUB DAN Region IPG OMC WPP PUB DAN US 5.1% 0.7% -4.2% na na US 2.0% 0.5% -3.2% na na North America na 0.4% -4.2% -0.8% 4.9% North America na 0.6% -3.2% 0.5% -1.5% International 6.2% 4.9% na na na International 1.6% 6.2% na na na UK 9.7% 0.7% -0.5% 3.8% na UK 4.1% 5.1% 4.8% 6.0% na EUR 5.3% 8.2% 2.0% 1.4% 7.4% EUR 3.4% 8.0% -0.8% 1.3% 3.1% APAC 3.9% 7.9% 1.2% -1.8% -1.7% APAC -2.5% 5.8% -1.4% -1.5% -0.6% LATAM 11.7% 2.0% 7.9% 4.5% na LATAM -0.1% 0.6% 3.6% 4.8% na ROW 3.4% -2.9% -3.1% 4.6% na ROW 4.6% 12.5% -3.1% 4.4% na Global 5.5% 2.6% -0.4% 0.1% 4.3% Global 1.9% 3.0% -0.9% 0.8% 0.4% Source: Company reports. Note: For DAN (Dentsu Aegis Network) North America is Americas, Source: Company reports. Note: For DAN (Dentsu Aegis Network) North America is Americas, EUR is EMEA, and APAC excludes Japan. EUR is EMEA, and APAC excludes Japan.
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Historical Agency Organic Growth Rates Figure 5: Ad Agency North America Organic Growth Historical by Year Figure 6: Ad Agency International Organic Growth Historical by Year 11.0% 7.0% 6.3% 8.9% 9.0% 6.0%
5.0% 4.5% 4.6% 7.0% 4.3% 3.8% 5.1% 5.1% 4.0% 3.5% 5.0% 4.4% 3.1% 2.9% 3.7% 3.0% 3.0% 2.1% 1.8% 1.6% 2.0%
1.0% 0.3% 1.0%
-1.0% -0.1% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Company reports and J.P. Morgan estimates. Note: Includes IPG, OMC, WPP, PUB, and DAN. IPG and OMC growth is U.S.; Source: Company reports and J.P. Morgan estimates. Note: Aggregate includes IPG, OMC, WPP, PUB, and DAN. International is the WPP, and PUB is North America. Uses Americas organic growth rate for Dentsu Aegis Network, but we estimate North America makes Total less Americas for Dentsu Aegis Network. We estimate North America makes up more than 90% of the Americas segment. up more than 90% of the Americas segment. Figure 7: Ad Agency North America Aggregate Organic Growth Historical by Quarter Figure 8: Ad Agency International Aggregate Organic Growth Historical by Quarter
7.0% 6.0%
4.8% 4.9% 5.3% 5.0% 4.6% 4.7% 4.8% 4.4% 5.0% 4.2% 4.4% 4.0% 4.2% 3.8% 4.0% 3.6% 3.7% 3.7% 3.2% 3.3% 3.0% 2.7% 3.0%
2.2% 2.0% 1.1% 1.6% 1.6% 1.0% 0.7% 1.1% 0.4% 0.5% 0.0% 0.2% 1.0% -0.2% -1.0% -0.6% -0.6% -0.7% 0.0%
Source: Company reports and J.P. Morgan estimates. Note: Includes IPG, OMC, WPP, PUB, and DAN. IPG and OMC growth is U.S.; Source: Company reports and J.P. Morgan estimates. Note: Aggregate includes IPG, OMC, WPP, PUB, and DAN. International is the WPP, and PUB is North America. Uses Americas organic growth rate for Dentsu Aegis Network, but we estimate North America makes Total less Americas for Dentsu Aegis Network. We estimate North America makes up more than 90% of the Americas segment. up more than 90% of the Americas segment.
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2018 was also notable for the divergent performance among the major holding companies. Disparity in organic growth, as measured by the best performing agency minus the worst performing, widened significantly during the year, in particular in North America.
Figure 9: Disparity in Big 4 Holding Company US Organic 10.0% 9.3% 9.0% 8.0% 7.0% 6.4% 6.6% 6.0% 6.0% 5.4% 5.0% 4.4% 4.0% 3.0% 1.8% 2.0% 1.0% 0.0% 2012 2013 2014 2015 2016 2017 2018
Source: Company reports and J.P. Morgan estimates. Note: equals highest organic growth among IPG, WPP, OMC, PUB in quarter minus lowest organic growth.
At least part of the difference we estimate can be attributed to client verticals. FMCG (i.e. F&B and CPG) marketers are dealing with a combination of slowing top-line growth, upstart and digitally native competitors, and in some cases activist investors pushing for bottom line improvement. Clients in this subsector have responded by shifting away from traditional brand investment, producing digital content with in- house studios, and relying more on trade or promotional activity to drive sales. The net result is a reduced scope of work for agencies, especially those such as PUB and WPP which over index to the vertical (see Table 2 below). At the same time, better underlying business trends in areas such as tech or healthcare have benefitted the holding companies with greater mix in these categories. Among IPG's top 100 clients for instance, the holding company has twice the exposure tech and healthcare relative to FMCG, which we think has contributed to outperformance in organic growth.
Table 2: Big 4 Agencies Revenue by Vertical Vertical IPG OMC WPP PUB F&B 12% 13% 13% 13% CPG 8% 9% 16% 13% Tech & Telecom 16% 13% 11% 13% Auto 17% 10% 13% 13% Financial 9% 8% 8% 17% Retail 6% 6% 7% 7% Health Care 25% 13% 12% 12% T&E na 7% 7% 7% Other 7% 21% 13% 5%
Source: Company reports. IPG is for Top 100 Clients or 55% of rev. PUB is clients representing 87% of revenue.
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Another factor contributing to disparity is exposure to underperforming or non-core businesses. This was highlighted during the year when OMC and PUB for a period disclosed organic growth ex-divested businesses. In the case of OMC, this metric excluded a number of CRM – Execution & Support agencies; the holding company has been pairing its portfolio in recent years, including print agency Novus and outsourcing firms MarketStar and Sellbytel. PUB’s results were negatively impacted ~70bps by Publicis Health Services, a sales outsourcing firm it is now selling. WPP meanwhile has seen underperformance in Data Investment Management, mainly Kantar, which for which it now plans to divest a majority stake. IPG and Dentsu Aegis Network have less exposure to this headwind, a factor which Dentsu execs have cited on earnings calls.
Where we think performance has diverged the most though is also the area under greatest pressure, namely creative, which remains the largest revenue discipline for agencies. The headwinds in creative are broadly known, though we review briefly here (see our Industry Trends section for a more in-depth view): 1) overcapacity and reduced client conflict has put marketers in a position to be more demanding of their agencies in term of both price and service; 2) marketers have brought some functions in-house that previously would have been handled by a creative AOR. For advertisers the benefits can include lower costs, greater control, faster speed to market, and superior knowledge of the product or service; 3) clients, in particular those in the FMCG vertical, have reduced the overall scope of work handled by an agency. P&G provided a relevant example of this on an earnings call last year when management said it was “reinventing advertising from mass clutter to less doing more,” which essentially means cutting the number of ads per product and changing ads less frequently; and 4) some marketers have shifted from an agency of record model to assigning work on a project basis, leading to greater volatility for agencies.
The disparity we’ve seen in this disruptive environment does highlight some of the more intangible competitive differences among the agency groups. For instance, large clients increasingly prefer to utilize resources from across the holding company organization, regardless of underlying agency; managing this process is no small task, and can be challenging from the standpoint of sales, culture, and even accounting. IPG has long organized itself around the concept of ‘open architecture’, a client-centric approach where marketers can access talent across various disciplines (creative, media, digital, experiential, etc.). In recent years, we’ve seen similar approaches from OMC (practice areas and client matrix organization) and PUB (‘Power of One’), though in general we think that the U.S. based agencies are further along this process, potentially benefitting organic growth.
We also think how digital expertise is layered through a holding company is impactful. For instance, IPG has long emphasized investment in digital at its individual units, as opposed to a building up specialist agencies. In contrast, WPP in recent years concentrated digital talent/knowledge at dedicated agencies such as VML or Wunderman, a structure it is now unwinding by combining those units with more traditional focused networks (e.g. VML + Y&R; Wunderman + JWT). Finally, even subtle cultural differences can impact organic growth. For instance, WPP’s new CEO Mark Read has commented on more than one occasion that his U.S. based agencies were too New York City-centric relative to competitors, potentially hurting them with clients.
IPG’s strong performance in the current environment does highlight the continuing value that agencies provide in the advertising process (we note there is nothing in IPG’s new business performance in 2017 or 2018 relative to peers that would suggest
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this is the source of its outsize growth). While the agency role is likely to evolve in the coming years, these companies have access to client relationships and talent that put it in a position to succeed and drive long-term shareholder returns.
Slight Deceleration in Global Ad Spend Expected in 2019 Global ad spend is expected to remain at healthy levels, though uniformly forecasters look for slightly more modest growth in 2019:
Table 3: 2018 and 2019 Global Ad Spend Forecasts Year GroupM Zenith Magna DAN 2018 4.3% 5.9% 6.1% 4.1% 2019 3.6% 4.7% 5.8% 3.8% Source: GroupM, Zenith, Magna, Dentsu Aegis Network
We think the more modest growth outlook is driven by the absence of cyclical events (Olympics, World Cup), in addition to lower global GDP growth.
Outlook for the Stocks With the group trading a sizeable discount to the market, we see generally good value among these stocks. Historically, the long-term EPS growth profile of agencies is relatively consistent and healthy, on average, in the high single digits. This is supported by low-single digit revenue growth and boosted by modest margin improvement and healthy share buybacks. In addition, capital expenditures for these businesses remain modest and FCF therefore healthy. With dividend yields now over 3%, total returns, even without multiple expansion, can equate to 10%-15%. As we review in this note however, industry challenges are leading to greater divergence in organic growth and margin expansion, while return profiles are being further skewed by FX and, in some cases, divestitures.
Mixed organic trends expected in 2019 with lower growth in aggregate. We are projecting organic revenues to grow 2.7% at OMC and IPG, -2.1% at WPP (net sales basis), 0.9% at PUB, and 2.3% at Dentsu Aegis. On an industry basis, this implies 0.8% growth in 2019 vs. 1.6% in 2018 and 1.1% in 2017. For U.S.-based agencies, a strong dollar is expected to create an FX headwind: we forecast an impact to revenue of -1.5% at OMC, -1.0% at IPG, while we calculate a +1.4% tailwind for Publicis and a -0.6% headwind for WPP.
Guidance indicates diverging margin performance in 2019. IPG is guiding to improvement of 40-50bps, excluding a one-time charge to right-size its cost structure following end of 2018 account losses; the company will benefit from the acquisition of higher margin Acxiom Marketing Solutions. OMC, for now, has not committed to a margin target for the year. WPP is expecting the margin to be down around 100bps excluding the impact of IFRS 16. The application of IFRS 16 will increase the operating profit margin by c50 bps but will also add c£100m to interest with a net 1.3-1.6p reduction to EPS. WPP expects the impact to be broadly neutral by 2023. PUB is targeting operating margin expansion of +30bps to +50bps in 2019/2020. We believe the company will continue to benefit from its current restructuring efforts and further synergies (Sapient synergies, benefits from the ERP switchover and shared services between agencies). Dentsu is guiding an operating margin of 13% for its overseas business in FY12/19, a similar level to last fiscal year. The company expects margins to gradually improve with steady topline growth and is aiming for 15% in FY12/21
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Financial leverage still a plus. Despite the overall softer growth environment relative to past years, we expect these companies to produce robust free cash flow in 2019. We also look for continued returns of cash to shareholders: we forecast OMC to repurchase $600m in addition to a dividend yield of ~3.5%. We assume no repurchases in 2019 at IPG as the company prioritizes reducing leverage, but we expect the company to maintain a very healthy ~4.4% dividend yield. While we forecast no share purchases for WPP in 2019, we see a dividend payout ratio of 63% in 2019. We expect PUB to have a payout ratio of 47% in 2019. For Dentsu, we expect it to achieve a payout ratio of 27.4% in 2019, and a dividend yield of 2.0%.
Valuation. On a 2019E P/E basis, agencies currently trade below their respective broader market benchmarks. IPG trades at 11.5x and OMC at 12.8x our 2019 EPS estimates vs. the S&P 500 at 17.4x. On our 2019E EPS, WPP trades at 9.1x, PUB at 11.5x, below the MSCI Europe Index at 14.0x. Dentsu trades at 14x on our 2019E adjusted EPS (21x on nominal EPS) vs. TOPIX at 12x.
Summary Outlook for Individual Stocks Interpublic Group of Companies Inc. (Overweight). In 2018, IPG organic growth accelerated to 5.5% (off a 1.8% comp) which compares to guidance at the start of the year for 2-3%. The strong performance was broad based across regions, disciplines and client verticals, and relative to 2017, IPG benefitted from better growth with Top 20 clients, a return of project work in areas like digital specialists and PR, better new business trends in the UK and Europe, and an improved macro environment. Company EBITA margin expanded 63bps to 13.5%, ahead of management's initial outlook for +20bps. On October 1, IPG completed the acquisition of Acxiom Marketing Solutions for $2.3b. IPG shares increased only 2.3% in 2018, though outperformed domestic and European peers, as well as the S&P (-6.2%). Management is guiding to a more modest 2-3% organic growth in 2019, which we think may be conservative even with very difficult comparisons and several client loses (FCA media, US Army) that will be a modest headwind especially for the US, beginning in Q2’19. Margins are targeted to improve 40-50bps helped by Acxiom (roughly 10% of revenues but a higher margin business) and ongoing leverage in the core business. We model EBITA growth of 11.1% driven by an incremental three quarters of AMS; deal associated interest expense and a higher forecast tax rate (also likely conservative) lead to more modest EPS growth of 0.6%. Our forecasts assume no share repurchases in 2019, as the company prioritizes reducing leverage. Shares currently trade at 11.5x our 2019 EPS, a -34% discount to the broader market, relative to the stock historically trading in line (around this time last year, IPG was trading at ~13.5x forward earnings, or a -20% discount). IPG's valuation is also discount to domestic peer OMC at 12.8x our 2019 EPS, which we think reflects different trajectories for domestic growth this year (OMC is set to accelerate while IPG is likely to slow). We see relative value in IPG shares, and believe outperformance on management's organic growth and margin targets, along with successful integration of AMS, could serve as catalysts for shares toward our Dec-19 $28 price target. At the same time, continued underperformance from European peers which has hurt investor sentiment around the whole group could act as a headwind to potential upside. Omnicom Group (Overweight). In 2018, OMC organic growth decelerated modestly to 2.6% from 3.0% in 2017 and 3.5% in 2016; original guidance for the year was 2-3%. International remained strong at 4.9% bringing the trailing four year period increase to 23%. The US improved marginally to 0.7%, but still
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remained below the 4-8% growth levels reached during 2012-2015 period. For the second straight year, divestitures were a material headwind to total revenue growth (-2.1% in 2018 vs. -4.2% in 2017), as Omnicom divested outsourcing firm Sellbytel and number of other CRM businesses. Company EBITA margin (excluded repositioning charges and the benefit of dispositions) was up 5bps. For 2019, management has targeted 2-3% organic revenue growth and flattish margins. Based on currency rates around Q4 earnings, FX is expected to be a headwind of around -1.5%; dispositions are also guided to a -2.5% impact for the year. We forecast organic growth of 2.7% in 2019, with the US improving to 2.4%, helped by new business wins with Ford, US Army, and WarnerMedia in addition to reduced drag from some CRM businesses that have been sold. We model EBITA margin growth of around 25bps, and EBITA growth of 0.6%; our EPS estimate for the year is up 2.2%, boosted by ongoing share repurchases. Q1 organic may start off a bit slow, as some recent losses (GSK) and a reduction in P&G Media work likely impact before new businesses wins flow through in Q2; both Ford and US Army were with other holding companies for long periods, and transitioning the business to Omnicom will take time. Meanwhile, International organic growth may moderate on challenging comparisons although we still expect strong performance to continue in those regions. OMC’s improving performance in the US and impressive new business momentum should continue to be a positive drivers in 2019. Shares currently trade at 12.8x on our 2019 EPS, a -26% discount to the broader market and 11% premium to IPG. The latter likely reflects a positive directional trend for US organic growth in 2019, despite our expectation that total organic for both companies comes in similar. At current levels, we find OMC shares attractive for a relatively consistent solid return and healthy 3.5% dividend yield. Publicis (Neutral). Publicis trading revenues remain volatile with Q4 revenues having been weak with organic revenue growth of -0.3% (versus consensus expectations at +2.5% at the time). Current weakness appears in particular to be driven by N America for Publicis and management stated that the business “suffers from higher-than-expected attrition in traditional advertising, mainly from several FMCG clients in the US.” However, a solid execution on costs and a new €400m share buyback program (due to lack of M&A options) provides upside. Publicis's core advertisers are spending less which increasingly is becoming a structural (rather than cyclical) issue. However, we do believe our current estimates for +0.9%/+0.1% in 19E/20E may prove too conservative with the company still targeting +4% organic revenue growth in 2020E together with margin improvement. At this level, we prefer WPP over Publicis on valuation grounds and better self help optionality. WPP Group plc (Overweight). WPP is a turnaround story. If it can execute and return to industry growth then we see scope for >20% upside from closing its valuation discount vs peers. It will take time to close the growth gap. Organic growth will remain weak in H1 given accounts losses but should begin to improve in H2 2019. The sale of a majority stake in Kantar could provide support in the interim, giving WPP financial flexibility to maintain its dividend and undertake bolt on M&A and buy backs, while at the same time removing market research drag on its organic growth. The shares trade on 9.1x 2019E P/E, for 2020-23E EPS growth of c7% pa and it offers a 2019 dividend yield of 7%. WPP trades on a 17% discount to its US peers in 2020 - which trade on 11.4x earnings - highlighting the potential upside if it can deliver on its turnaround strategy. We maintain our OW rating.
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Dentsu (Neutral). Work-style reform measures in Japan have finished for now, but Dentsu is prioritizing investment in order to regain its competitiveness, and the profitability improvement looked for by the market will not arrive in 2019. We also think the company is unlikely to outshine its many rivals in overseas business because few new accounts were picked up in 2018. We expect upward progress by the share price to remain difficult until top-line growth clearly recovers both in Japan and overseas. Management’s FY2019 guidance has gross profit in Japan rising around 6% YoY (excludes Voyage Group consolidation effects) following 2% growth in 2018, and gross profit overseas rising around 3% following 4.3% growth in 2018. We think guidance is slightly optimistic given that domestic weakness was confirmed in October–December (–3.0% YoY), and few new overseas accounts were picked up in 2018. Within domestic business the greatest improvement is required in internet advertising, but growth has now recovered to more than 20% YoY, and benefits are likely from the major sporting events scheduled in 2H FY2019 and FY2020. We thus see no need for undue pessimism, but nevertheless do not expect Dentsu to fully recover its competitiveness until internet advertising is reinforced. Some bright signs are appearing in overseas business, such as the current expansion of work for P&G in North America (management commented that the contract will roughly triple from an estimated $350 million previously), but business remains poor in the Asia-Pacific region and the outlook is thus discouraging in overall terms. We rate Dentsu Neutral with a Dec 2019 PT of ¥5,200, implying 10% potential upside. This equates to an EV/EBITDA of 9.0x and P/E of 15x based on our FY2019 adjusted EPS estimates. Scope of this report This report is an overview of the advertising and marketing services industry. We start with an overview of the industry’s size and growth dynamics in relation to GDP and consider the growth of advertising as a global industry. We then look at the different media in which advertising is placed before thoroughly investigating the structure of an advertising and marketing services company. With this understanding, we discuss industry growth drivers and trends, including the compensation structure. Finally, we provide a financial outlook for the industry, a look at valuation of the five advertising and marketing services companies under our coverage, and snapshots of each of the leading global advertising and marketing services companies.
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The Advertising Market
The advertising and marketing Most broadly defined, advertising is everything that comes out of a marketing services industry today budget. It includes traditional advertising (the dollars behind a media buy as well as the creative work to support it) and also many other forms of marketing, including direct mail, promotional sales (coupons or incentive-based advertising), public relations, market research, event marketing, and specialist forms of marketing, including health care communications. Depending on the definition, advertising expenditures in the U.S. account for anywhere between 1% and 3% of GDP, or an estimated $462 billion in 2018, according to leading forecaster ZenithOptimedia, which includes marketing services spending such as direct mail, or $204 billion if only including major media. The U.S. is the largest advertising market in the world, accounting for ~37% of the $595 billion in global major media spending in 2018.
While perhaps not as important as many years ago prior to the huge growth in subscription/retransmission, advertising remains a critical revenue stream for most media companies, including television, digital, cable, radio, newspapers, and other new media, which can fluctuate based on the health of the overall industry. The ad agency or sometimes called a diversified advertising and marketing services company, is most commonly used today to describe the major holding companies that own a variety of agencies that create, manage, and place marketing campaigns, as well as offer many other marketing services such as public relations, direct marketing, market research, and digital businesses.
In this section, we provide an overview of the advertising and marketing services industry, taking a look at the correlation between advertising spending and GDP. We also look at how advertising spending reacts to economic cycles in the United States. This is followed by a look at the effect of two significant events on advertising spending every two years, the U.S. political elections and the alternating summer and winter Olympic Games. Finally, we examine trends in international advertising expenditures.
Tracking Ad Expenditures A number of organizations track advertising expenditures and forecast spending by medium. The most notable sources include ZenithOptimedia (part of Publicis), GroupM (WPP), and MAGNA (IPG).
Figure 10: U.S. Advertising Growth Projections, 2016-19E ($ in billions) GroupM MAGNA Zenith Dec-18 Apr-19 Mar-19 2016 3.2% 6.2% 4.4% 2017 2.2% 4.9% 6.6% 2018 3.7% 7.3% 7.1% 2019 2.2% 4.1% 5.0% Note: Major media only. MAGNA’s figures represent ad revenues at media properties, as opposed to ad spending from the advertiser side for the others. MAGNA data is ex-cyclical events. Source: MAGNA, GroupM, Zenith, BEA, J.P. Morgan estimates.
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Advertising vs. Global Economy Advertising is highly cyclical. For most industries, ad spend as a proportion of sales is fairly steady, and therefore correlated to GDP. As a percentage of GDP, U.S. advertising spending on major media has averaged 1.25% since 1980, hitting a peak of 1.5% in 2000 with the dot-com bubble. Ad spending has a lagging cyclical relationship with the economy (see Figure 12), typically by six to eight months. The advertising industry generally moves through long cycles: in the first year or two out of an economic recession ad spending tends to lag nominal GDP growth, then match GDP growth in the second or third year, and then surpass it in subsequent years. The most recent recovery initially followed this trend with major media spending lagging the economy in 2010/2011, then slightly exceeding GDP growth in 2012-2014. Since then, ad spend relative to economic growth has mixed.
Advertising spending in slow Since 2000, advertising spending has been in a steady decline relative to the overall decline vs. overall global economy, taking a further step-down during the 2008/2009 recession. There are a economy few reasons for this trend. First, media has become more fragmented providing marketers with more choice, and therefore a bit more leverage when negotiating rates. For instance, unlike 20 years ago where a major advertiser had to be on one of 4 major broadcast networks during primetime, the advertiser today has significantly greater options for reaching consumers, including on linear television and digital platforms. Secondly, many advertisers such as FMCG companies have been struggling with mature businesses, lackluster volume growth, and limited pricing power. This has put pressure on top lines, leading management teams to focus on cost cutting, resulting in smaller ad budgets in many cases. Third, the shift of budgets to often unmeasured marketing channels and away from paid media (e.g., a Facebook page or YouTube posting has no explicit media cost), a trend exacerbated by the proliferation of digital-native or direct-to-consumer brands (e.g. Dollar Shave Club; Warby Parker) which tend to forgo traditional channels in their early lifecycle. This pressure has been more pronounced in more mature markets like the US but we are seeing similar trends in other geographies as well.
Agency revenue performance lags media spend We note that as ad spending tends to lag the economy by at least six months, agency revenue performance additionally tends to lag media spend by another three to six months, reflecting their fee structure (as opposed to a commission on spend) where a quick increase or pullback in a client’s media spend will have a limited immediate impact on agency financial performance. It is generally only after a meaningful shift in budget or strategy (i.e., scope of work) that fees are renegotiated.
Looking back at the 2008 downturn, while many media companies saw sharp ad revenue pullbacks in the third and fourth quarters (particularly on the local level), the agencies maintained good revenue growth in Q3 and only modest declines in Q4 (WPP was even positive) before seeing their steepest double-digit declines mid 2009. The strongest rebound then hit in mid 2010, roughly two quarters after the TV networks.
At this stage in the cycle, we would typically expect growth at both the media players and agencies to be roughly in line. Instead, for reasons that we cover in this report, we find agency organic growth has underperformed GDP materially over the prior two years.
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Figure 11: US Agency Organic Growth Relative to US GDP Growth 10.0% 8.9% 9.0% 8.0% 7.0%
6.0% 5.1% 5.1% 5.3% 5.0% 4.2% 4.4% 4.4% 4.2% 3.8% 4.0% 4.0% 3.7% 3.6% 3.7% 3.0% 2.7% 1.8% 2.0% 1.6% 1.0% 0.3% 0.0% -1.0% -0.1% 2010 2011 2012 2013 2014 2015 2016 2017 2018
GDP % y/y Agency organic % y/y
Source: Company reports; Zenith
The following exhibits show ad spending figures, along with comparisons to GDP.
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Table 4: U.S. Advertising & Marketing Expenditures vs. Nominal % change in Advertising Marketing Advertising Marketing Nominal Advertising Marketing Nominal Expenditures Expenditures Year Expenditure Expenditure GDP Expenditure Expenditure GDP % of GDP % of GDP 1980 $35.5 $2,857.3 1.24% 1981 39.8 3,207.0 12.1% 12.2% 1.24% 1982 43.5 3,343.8 9.3% 4.3% 1.30% 1983 49.8 3,634.0 14.5% 8.7% 1.37% 1984 57.7 4,037.7 15.9% 11.1% 1.43% 1985 61.6 4,339.0 6.8% 7.5% 1.42% 1986 66.2 4,579.6 7.4% 5.5% 1.45% 1987 70.6 4,855.3 6.7% 6.0% 1.45% 1988 76.7 5,236.4 8.7% 7.9% 1.47% 1989 81.0 5,641.6 5.6% 7.7% 1.44% 1990 83.9 5,963.1 3.5% 5.7% 1.41% 1991 82.2 6,158.1 -1.9% 3.3% 1.34% 1992 84.2 6,520.3 2.4% 5.9% 1.29% 1993 87.4 6,858.6 3.8% 5.2% 1.27% 1994 92.1 7,287.3 5.3% 6.3% 1.26% 1995 98.0 7,639.8 6.5% 4.8% 1.28% 1996 104.9 8,073.1 6.9% 5.7% 1.30% 1997 112.0 8,577.6 6.9% 6.2% 1.31% 1998 120.7 9,062.8 7.8% 5.7% 1.33% 1999 139.9 9,630.7 15.9% 6.3% 1.45% 2000 156.7 $344.5 10,252.4 12.0% 6.5% 1.53% 3.4% 2001 147.2 334.1 10,581.8 -6.0% -3.0% 3.2% 1.39% 3.2% 2002 149.8 339.0 10,936.5 1.7% 1.5% 3.4% 1.37% 3.1% 2003 152.3 335.7 11,458.3 1.7% -1.0% 4.8% 1.33% 2.9% 2004 161.5 350.2 12,213.7 6.0% 4.3% 6.6% 1.32% 2.9% 2005 166.2 360.7 13,036.6 2.9% 3.0% 6.7% 1.28% 2.8% 2006 173.4 374.4 13,814.6 4.3% 3.8% 6.0% 1.26% 2.7% 2007 177.7 386.4 14,451.9 2.4% 3.2% 4.6% 1.23% 2.7% 2008 170.6 381.2 14,712.8 -4.0% -1.3% 1.8% 1.16% 2.6% 2009 148.8 347.9 14,448.9 -12.8% -8.7% -1.8% 1.03% 2.4% 2010 152.2 351.0 14,992.1 2.3% 0.9% 3.8% 1.01% 2.3% 2011 154.7 357.3 15,542.6 1.7% 1.8% 3.7% 1.00% 2.3% 2012 161.9 369.6 16,197.1 4.6% 3.5% 4.2% 1.00% 2.3% 2013 168.0 379.3 16,784.8 3.8% 2.6% 3.6% 1.00% 2.3% 2014 176.3 394.0 17,521.8 4.9% 3.9% 4.4% 1.01% 2.2% 2015 182.7 407.0 18,219.3 3.6% 3.3% 4.0% 1.00% 2.2% 2016 190.8 421.5 18,707.2 4.4% 3.6% 2.7% 1.02% 2.3% 2017 203.5 438.9 19,485.4 6.6% 4.1% 4.2% 1.04% 2.3% 2018 218.0 461.6 20,513.0 7.1% 5.2% 5.3% 1.06% 2.3% 2019E 228.8 477.9 21,482.4 5.0% 3.5% 4.7% 1.07% 2.2% 2020E 238.5 493.7 22,289.3 4.2% 3.3% 3.8% 1.07% 2.2% 2021E 250.0 508.3 23,096.0 4.8% 3.0% 3.6% 1.08% 2.2% Source: Zenith, IMF. Note: Marketing Expenditure is Advertising Expenditure + direct mail, telemarketing, sales promotion, PR, sponsorship, and directories
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Figure 12: Change in Ad Expenditures vs. Nominal GDP 1980-2021E 20%
15%
10%
5%
0%
-5%
-10%
-15%
Recession Ad Spending %chg GDP %chg
Source: Zenith, IMF
Figure 13: Advertising & Marketing Spending as % of Nominal GDP, 1980-2021E 3.80%
3.30% 3.4%
2.80%
2.4% 2.30% 2.3%
1.80% 1.5% 1.5%
1.30% 1.1%
0.80%
Recession Ad Spend as % of GDP Marketing spend as % of GDP
Source: Zenith, IMF
Globally, advertising spend on major media as a percentage of GDP has decreased from 1% in 2000 to 0.7% in 2018, driven by declines in the US, Western Europe and developed APAC countries. Some markets have bucked this trend, notably the UK where robust growth in Internet has more than offset declines in print, leading to a steadier trend. In China, ad spend has outpaced economic growth, though as a percentage of GDP stands at 0.65%, below the US. India is a large economy with a markedly below average advertising market, at just 0.33% of GDP. This is in part due to a fragmented retail industry, as the country’s retailers mainly operate regionally with little foreign competition, resulting in lower need for marketing.
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Advertising Spending During Recessions Corporations are quicker to hit the brakes on media spend, though at the risk of losing crucial market share Ad spending has declined relative to GDP in the last three recessions of 2009, 2001, and 1991. In the two prior recessions in the early 1980s, ad spend maintained outperformance to the economy. We believe the common factor in more severe ad performance in the last two decades is simply faster corporate reaction to a downturn that often includes a sharp pullback in media spending to preserve corporate profitability. Once a downturn bottoms and consumer spending stabilizes/improves, media spend can quickly return as corporations shift from protecting margins back to protecting market share and growing revenue.
Ad spending fell 1.9% in 1991 and 6.0% in 2001, dipping as a percentage of GDP in both years. This behavior was historically atypical as growth was particularly robust in the three prior recessions, increasing on average 6% in 1973-75, 10% in 1980, and 9% in 1982 as companies worked especially hard to boost consumption and differentiate their products. However, ad spending did once again underperform GDP growth in the most recent severe recession, falling over 10% in the US in 2009.
A robust ad budget is key in “There are few things as detrimental as a lapse in advertising. It costs much more to difficult times, although it get up advertising momentum than it costs to keep it going. And once you let that doesn’t always result in ongoing momentum die, you must start almost from scratch again.” — Charles Brower, late spending President of BBDO
While it may be a natural reaction to restrain spending during periods of economic difficulty, a past study from the American Association of Advertising Agencies (AAAA) demonstrates that advertising during difficult times results in much greater market share gains than in periods of economic prosperity. The study showed that during a recessionary period, an increase in marketing expenditures resulted, on average, in a 1.5-point gain in incremental market share. The same increase in a strong economy showed no market share gains, on average. Furthermore, the study pointed out several examples of companies that aggressively marketed during recessions and how they have fared compared to their competition. For instance, during the Great Depression of the 1930s, Kellogg maintained its advertising while Post pulled back. The study goes on to suggest that this decision is likely responsible for Kellogg’s dominance in the cereal category during the second half of the 20th century.
While this study does not imply that companies will increase their marketing budgets in difficult times, it does suggest that the negatives associated with an advertising pullback are often much more severe than the short-term fix a cut in spending may do for the bottom line.
2009 marked the worst ad The recession in 2009 was the worst since WWII for ad spending, even since the recession since WWII 1930s. Major media ad spend fell roughly 13% in the US in 2009. This falloff was largely driven by a very weak local ad market (notably auto), with more modest declines at the national level.
The local ad market in the downturn was hampered by (1) the high concentration in the more cyclically sensitive industries (auto and retail make up close to 50% of the local ad market), (2) ad dollars continuing the trend of moving out of the local market into national market due to the “Wal-Mart effect” (small businesses being eaten up by bigger national chains); and (3) the less resilient nature of local
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businesses to spend in a downturn, which leads to bigger cuts in a down-cycle and a lag in recovery. A decline in audience at many major local media (fewer readers of newspapers, fewer listeners to radio, and the migration of viewership to cable and the Internet away from local TV) has also played into the relative weakness.
National ad spending fell as well, largely reflecting declining revenues among major advertisers. While large advertisers tend to lag on the way into a downturn, just as many will fight the tide and continue spending as long as they can to preserve market share and stimulate growth. However, at a certain point ad budgets contract in an effort to preserve profitability in a declining revenue environment, which is what we eventually saw in 2009.
Advertising Spending During Economic Expansions Advertising expenditures have historically outpaced GDP growth through expansionary cycles, as seen since 1975 below, though we believe new and unpaid media have altered this trend, as discussed above.
Figure 14: Advertising Expenditure and GDP Growth — Past Expansionary Periods CAGR of Change in Ad Exp. / Expansionary Period No. of Months Ad Expenditures GDP Growth GDP Growth Mar 1975 - Jan 1980 58 13.4% 11.5% 1.17x July 1980 - July 1981 12 11.6% 9.7% 1.20x Nov 1982 - July 1990 92 9.0% 7.5% 1.20x Mar 1991 - Mar 2001 120 6.6% 5.2% 1.27x Nov 2001 - Dec 2007 73 3.2% 5.3% 0.60x Jan 2010 - Present 111 3.6% 4.0% 0.90x Source: National Bureau of Economic Research, Robert Coen, MAGNA, IAB, J.P. Morgan, latest cycle (Jan 2010 - present) compares combined annual growth rate from 2009-2018.
The previous full expansion (2001-2007) did not see ad spending growth exceed GDP growth. In the current expansionary cycle, major media spend initially trailed nominal GDP in 2010/2011 before slightly outpacing GDP growth in 2012-2014, and again in 2016. For 2019, we expect advertising expenditures to continue to be soft relative to GDP, especially as we comp the benefit of quadrennial events. As discussed elsewhere in this report, we also believe reported media spend is more muted than the overall marketing environment as a result of the secular shift to unmeasured formats (notably digital, such as social). Exemplifying this secular change is the agencies’ own reported organic growth (they are still paid to execute non-traditional campaigns), which outperformed industry media spend through much of the recovery, though this trend has broken over the prior two years.
In the US, National and Local Advertising Markets Increasingly Different
Local advertising likely to In 2019, we believe overall spending will grow low-mid single digits. However, continue its decline. this will be much more skewed toward positive national advertising growth while local advertising will likely be negative. Approximately 55% of US advertising is national with the balance local. In the US, we expect national advertising to once again outpace core local growth (excludes political) this year for several reasons: 1) the increasing digitization and consolidation of many industries (think Amazon in retail or Wayfair in furniture) has led to a shift in media spend from local to national
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businesses; 2) national advertisers, in general, seem to be in better financial health and more aggressively pursuing market share; 3) weakness in specific local verticals, such as retail where department stores are either shifting spending to national media or pulling back entirely; 4) and another potential down year for auto advertising, driven by lower new car sales, which JPM forecasts to come in at 16.75m compared to 17.3m in 2018.
National advertising continues to grow but at a more moderate pace. In our recent report from last month we looked at spending plans for the top 100 global advertisers and estimated that 74% of those that provided commentary expect to increase spending in 2019 while only 4% are planning to cut; this is a pretty typical mix for an expansion year.
Political and Olympic Advertising Provide a Boost to Ad Spending in Even Years 2018 political spending came in Every two years, the advertising industry benefits from U.S. elections and the well above expectation Olympic Games as mass audiences in the U.S. and abroad tune in to monitor the progress of each event.
Every calendar year can be classified as a congressional, presidential, or off-election year (although some state and local elections may occur in off years). In congressional years, one-third of the Senate, all of the House of Representatives, and approximately 75% of state governors are elected. In presidential years, the president, one-third of the Senate, all of the House of Representatives, and 25% of state governors are elected. Odd-numbered calendar years are off-election years.
We estimate roughly 75% of political advertising is spent on local television, which includes broadcast and cable. Digital (mainly Facebook) accounts for 15-20%, with the balance split between direct mail, radio, and print. While the share of Internet has been increasing, this has mostly been at the expense of non-television forms of media. We expect local TV to continue to capture the vast bulk of political ad dollars going forward, reflecting the medium’s broad reach, easy measurability, and continued popularity with an older demographic that is more likely to vote. Historically, political advertising-related expenditures on local TV have consistently increased over previous election years. Looking at the last few cycles, 2012 shattered existing records on virtually all fronts, with an estimated $6 billion in total campaign spend, by some estimates. A key difference in that cycle was the rise of Super PACs, which were first created in 2010 as a result of the Supreme Court ruling in the landmark Citizens United case.
In 2014, political ad spend for local TV was $2.7b, higher than in 2010, though below the levels seen for the record presidential year in 2012. In 2016 growth stalled with local television spend flat relative to the 2012 cycle, and below many industry forecasts from the end of 2015. The disappointing result was driven by a decline in Presidential advertising: Trump spent less, making greater use of social media and free exposure on cable news networks, and as a result Clinton spent less too.
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Figure 15: 2012 and 2016 Presidential Campaign Ad Spend $ in millions
$600 $550 $500 $500 $409 $400
$300
$200 $161
$100
$0 Obama '12 Clinton '16 Romney '12 Trump '16
Source: Kantar Media
Following 2016, there was some investor concern regarding the long-term outlook for broadcasters, with a view that Trump’s victory had fundamentally changed how campaigns would allocate their advertising. However, spending in 2018 has largely alleviated those fears, with a record haul despite it being a non-presidential year. Total political revenue for the cycle was up 78% vs. 2014 and 17% vs. 2016. Final totals were also significantly higher than estimates at the start of election campaigns.
Table 5: US Election Advertising Spend $ in millions Media 2012 2014 2016 2018 Local Broadcast TV 3,100 2,100 2,850 3,100 Local Cable TV 600 600 850 1,200 Digital na 250 650 950 Network 100 nm 125 nm Total na 2,950 4,475 5,250 Source: Kantar Media / CMAG
Similar to political advertising, the big gainers from Olympic Games spending are network and spot television, with digital capturing some dollars.
Ad spending on the Olympics is not all incremental as many advertisers will simply reallocate dollars to the Olympics from other programming or will shift dollars to the Olympic Games from other times in the year. However, official sponsors do increase their budgets, many advertisers develop new Olympic-themed campaigns to push their products (meaning much new work for the agencies), and pricing is high around the event. Therefore, the Olympics do have a modest inflationary impact on the overall ad market.
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Figure 16: U.S. Share of Incremental Olympics Ad Spend by Medium
Digital 5 % Local Broadcast 13%
Nati onal Broadcast 56% National Cable 26%
Source: Magna Global
In May 2014, NBCUniversal signed a new $7.65 billion deal (plus an additional $100 million signing bonus) with the International Olympic Committee for the media rights to the Olympic Games through 2032 once the current deal expires in 2020. The new deal is a ~15% premium over the previous contract when broken down by event. While previously NBCU acquired the rights only after outbidding rivals ESPN and Fox Sports, the new agreement was a unilateral negotiation.
Summer Olympics tend to have higher ratings than winter but both events are seeing a shrinking audience in recent years. For the most recent Winter Olympics in Pyeongchang, NBC stated they sold $920m in ads, which compares to a rights fee of $963m. Notably, the WSJ reported that several large advertisers, including GM, P&G, and AT&T cut their spending relative to the 2014 games in Sochi. NBC broadcast-only primetime viewership was down -17% for the 2018 games relative to 2014. Total Audience Delivery, which includes cable and streaming, was down only -7% vs. NBC broadcast. Relative to other major networks (ABC+CBS+FOX), NBC’s broadcast primetime advantage was 82%, up from 43% in 2014.
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International Trends
IPG, OMC, and PUB have a similar revenue mix, deriving a little more than half of their sales from North America, 20-30% from Europe, around 10% from Asia Pacific, and less than 5% from Latin America. WPP's revenue mix is approximately a third North America, a third Europe, and a third emerging markets. In 2018, the major agencies in aggregate had 3.1% organic revenue growth in International (ex- North America) markets, accelerating from 2.1% in 2017.
Figure 17: Advertising and Marketing Services—Geographic Distribution of Revenues, 2018 OMC IPG Africa & Middle Latin America East Other 3% Latin America 2% 6% Asia Pacific 5% 11% Asia/Pacific 11% Euro & Other Europe U.S. 19% 52% Continental Europe U.K. 9% U.S. 10% 60%
Other North UK America 9% 3%
WPP PUB Middle East Africa 3%
AP, LA, AME, CEE Latin America 4% 31% N. America 35% Asia Pacific 10% North America 53%
W Cont. Europe UK 21% 13% Europe 29%
Source: Company reports and J.P. Morgan estimates.
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Table 6: Ad Agency 2018 Organic Growth by Region 2018 Region IPG OMC WPP PUB DAN US 5.1% 0.7% -4.2% na na North America na 0.4% -4.2% -0.8% 4.9% International 6.2% 4.9% na na na UK 9.7% 0.7% -0.5% 3.8% na EUR 5.3% 8.2% 2.0% 1.4% 7.4% APAC 3.9% 7.9% 1.2% -1.8% -1.7% LATAM 11.7% 2.0% 7.9% 4.5% na ROW 3.4% -2.9% -3.1% 4.6% na Global 5.5% 2.6% -0.4% 0.1% 4.3% Source: Company reports. Note: ROW is Middle East Africa for OMC, WPP, and PUB.
Zenith currently forecasts global advertising spend to increase 4.7% in 2019, a slight downtick from 5.9% in 2018, with more modest growth expected across all major regions. The outlook is consistent with the research arms of other ad agencies, including MAGNA (IPG), GroupM (WPP), and Dentsu Aegis Network (Dentsu) which similarly call for a deceleration. A key factor driving the slower forecasts is the coming of cyclical events last year, including the Winter Olympics and FIFA World Cup. Below we look at Zenith forecasts for spending by region:
Figure 18: Zenith Ad Spending Outlook by Geographic Region 2015 2016 2017 2018E 2019E North America 3.6% 4.5% 6.7% 7.1% 4.8% Western Europe 4.2% 4.0% 2.9% 3.5% 2.9% Asia/Pacific 6.3% 7.2% 5.1% 5.6% 5.3% C & E Europe -3.7% 9.1% 11.0% 9.0% 7.3% Latin America -4.5% 2.0% 5.9% 4.5% 2.8% Middle East & North Africa -9.8% -21.4% -15.2% -11.6% -4.8% Rest of world 10.2% 10.3% 11.5% 10.9% 11.0% World 4.4% 5.1% 5.5% 5.9% 4.7% Source: Zenith Optimedia, Mar 2019.
Western Europe: growth in 2019 is expected to decelerate slightly to 2.9% from 3.5% in 2018; France is expected to be one of the fastest-growing markets in the region with a 4.7% increase in ad spending in 2019 due to growth in video and social media advertising. We note that OMC’s 8.2% growth in Europe in 2018 was off an already tough comp of 8.0% in 2017.
Figure 19: Top 5 Western Europe Markets 2015 2016 2017 2018E 2019E UK 11.0% 6.6% 5.0% 5.9% 4.4% Germany 1.9% 3.0% 1.3% 1.2% 1.0% France 0.5% 1.7% 2.9% 5.7% 4.7% Italy 1.9% 3.7% 0.7% 2.0% 0.9% Spain 6.6% 4.8% 1.1% 2.9% 2.0% Source: Zenith Optimedia, Mar 2019.
UK: Zenith forecasts growth in the United Kingdom despite the looming possibility of Brexit, but expects growth to decelerate to 4.4% in 2019 from 5.9% in 2018. Similarly, GroupM looks for ad spend to increase 5.1% in 2019, down from 6.1% in 2018. IPG was a notable outperformer in the country last year, which management attributed to new business wins and the competitive positioning of its agencies. While IPG has stated they’ve
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seen big pullbacks from clients due to Brexit, WPP commented that it was more cautious on the region for 2019.
Latin America: growth for the region is forecast to slow to 2.8% in 2019, from 4.5% in 2018, with deceleration driven by further devaluation of the Argentine Peso and the comping of last year’s FIFA World Cup. Brazil remains the largest market in the region at around 50% of total spend, is expected to remain relatively steady at 4.5% growth (5.5% in 2018).
Figure 20: Top 5 Latin America Markets 2015 2016 2017 2018E 2019E Brazil 5.8% 5.5% 4.5% 5.5% 4.5% Mexico 2.8% 3.1% 9.7% 11.0% 6.3% Colombia -10.3% 18.3% 13.0% 12.3% -6.6% Panama 9.8% 11.8% 15.0% 12.0% 12.9% Chile 10.2% -0.5% 1.0% 5.4% 7.0% Source: Zenith Optimedia, Mar 2019.
APAC: growth is forecast to slow modestly to 5.3% in 2019 (from 5.6% in 2018). Developed countries (Australia, New Zealand, Hong Kong) are expected to grow at 3.6%, accelerating from 2.6% in 2018 helped by election spending in Australia. Developing countries are forecast to increase ad spend 7.3%. The slowing growth compared to the high single-digit or double-digit growth since 1996 can be attributed mainly to China, which Zenith estimates at +6.4% (vs. 7.8% last year). We note that GroupM forecasts a more modest deceleration for the region to 5.5% in 2018 from 6.9% in 2019. WPP in its Q4 results reported a decrease in Greater China organic growth to -1%, which management attributed to softer macro and trade war concerns.
Japan: According to Dentsu the Japanese ad market grew a robust 2.2% YoY in 2018, but it only expects 0.6% growth in 2019. 2018 was affected by numerous natural disasters and other factors, but ad demand held up well with assistance from the Winter Olympics and FIFA World Cup. The ad market is likely to be weak during 2019 due to concerns including the risk of economic recession and effects from the consumption tax hike scheduled in October. Attention is now focusing on the impact from the first Rugby World Cup to be held in Asia (in Japan, from September 20 to November 2), and how much preparations for the 2020 Tokyo Olympics and Paralympics will boost ad demand. Dentsu forecasts Japanese ad market growth to recover to 2.4% YoY in 2020, owing to the Tokyo Olympics and Paralympics.
Figure 21: Top 5 APAC Markets 2015 2016 2017 2018E 2019E China 9.1% 10.2% 5.9% 7.8% 6.4% Japan 0.8% 3.0% 2.9% 1.6% 1.0% South Korea 3.1% 3.7% 2.8% 3.5% 4.5% Australia 9.3% 7.8% 2.8% 3.6% 3.2% India 18.7% 11.1% 13.3% 12.6% 15.1% Source: Zenith Optimedia, Mar 2019.
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Dissecting Advertising Spending
Over the past few decades, the media landscape has changed with the birth of “new” media: cable in the 1980s, the Internet in the 1990s, and mobile devices this century. The major traditional advertising media now include television, Internet/mobile, radio, newspapers, magazines, and outdoor. After some growing pains and ongoing refinement in the early part of this decade, digital (Internet and mobile combined) has emerged as an advertising medium that has now surpassed TV and will likely continue growing share of budgets. Digital now represents over half of overall advertising spending, narrowing the gap with the portion of consumers’ time spent with media. In 2019, the media that are expected to receive the greatest amount of total advertising dollars are Digital (57%) and television (27%).
The trends that we have witnessed for the last few years will likely remain unchanged for the foreseeable future, including ongoing moves to digital from just about all media (local advertisers moving dollars from radio, newspapers, direct mail and local TV and national spenders moving from network TV/cable) and a relatively stable market share for out-of-home. There are however often short-term disruptions to these trends. For example, whenever there are concerns around digital brand safety, data breaches or poor measurement standards, we tend to see some dollars revert for a brief period back to traditional media. TV has held onto its position, perhaps better than it deserves given the rapid decline in audiences, we think, due to the lack of a perfect alternative to reach mass audiences, which has helped it maintain share and will likely continue to do so until its mass appeal is no longer considered mass.
Figure 22: U.S. Advertising Spending by Medium, 2019E Radio OOH 6% 4% Print 6%
TV Digital 27% 57%
Notes: All revenues exclude political and Olympic advertising; Newspapers exclude digital advertising, which is included in the Digital; Radio includes satellite radio. Source: MAGNA Global, J.P. Morgan, April 2019.
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Figure 23: Shift in Media Mix, 1980-2010 1980 1990
Directories Outdoor Cable TV 6.2% 2.5% Cable TV Directories Outdoor 2.8% 0.2% 2.8% Radio 8.3% 8.9% Newspapers Newspapers Radio 36.4% 34.7% 9.5% Local TV (ex. Cable) 10.4% Local TV (ex. Cable) 10.1% Direct Mail 12.2% Direct Mail National TV National TV 10.3% (ex. Cable) Magazines (ex. Cable) Magazines 10.0% 13.1% 10.1% 11.5%
2000 2010
Digital (Internet & Mobile) Cable TV Digital 4.6% Cable TV Outdoor 7.1% (Internet & Directories 14.2% 3.0% Mobile) 7.0% 15.5% Outdoor Newspapers Directories 3.6% 27.8% 4.1% Radio Newspapers 11.3% 13.7% Radio 8.9%
Local TV National TV (ex. Cable) Local TV 9.1% National TV (ex. Cable) (ex. Cable) 9.4% (ex. Cable) Direct Mail Magazines 9.1% Direct Mail Magazines 9.0% 10.3% 10.9% 12.1% 9.3%
Notes: All revenues exclude Political and Olympic spending. Source: MAGNA Global, J.P. Morgan estimates.
Since each medium is measured by a different metric, cost is determined from a number of criteria such as creative formats, reach or coverage of advertising, frequency of delivery, and time slot selected. However, to level the playing field and compare the cost of each medium, marketers use the metric of cost per thousand, or CPM.
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Figure 24: CPMs Across Major Advertising Media, 2017-18 CPMs Medium Age 18-34 Age 25-54 Description Network TV (30-second ad unit) Early AM $74.58 $31.47 Broadcast programs nationally through a group of afiliated Daytime 26.56 18.81 stations. Usually the same programs are simultaneously Early News 72.90 31.12 broadcast within a region. Prime Time: Mon-Sat 8-11pm Primetime 83.69 53.03 and Sun 7-11pm. Late Evening 67.49 47.24
Syndication Daytime 24.48 15.67 Syndication is the distribution of programs Early Fringe 48.90 25.05 by non-network stations and vary by air Prime Access 117.60 51.57 time, date, and market. Late Fringe 51.98 27.21
Cable TV (30-second ad unit) Daytime 17.50 10.51 Cable is more targeted than broadcast TV Late Evening/Early Morning 35.83 21.95 due to more interest-specific programming Primetime 59.18 28.93
Radio (30-second ad unit) Network 16.30 9.70 Reach specific target audiences locally through nationally affiliated stations. Spot (100 Markets) 26.45 15.78 Purchase radio time by selected market and station. Reach is determined by the number and size of markets.
Magazines (4-color page) Targeted Buy 49.10 24.25 Targeted medium that reaches a selected audience over a relatively extended life.
Newspapers (Mag. Size, white page) National Buy 91.60 43.30 Timely mass medium that is considered an "action medium" where readers seek sales, classifieds, and coupons. Local circulations reach approx. 60% of households in a market. Out-of-Home (30-Sheet Poster) Billboards/Posters 15.10 9.22 Outdoor media properties that require a specific location or event. Examples include billboards, posters, blimps, transit advertising, etc.
Source: Media Dynamics; J.P. Morgan estimates
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Television Television offers advertisers Television allows for cost-effective reach of advertising to mass audiences, mass reach especially since 96% of U.S. households have at least one television (according to Nielsen). As a result, TV is suited to marketers selling products that are widely distributed, such as consumer packaged goods, autos, and retail goods. Television is expected to capture approximately 28% of total major media spending in 2019. TV’s CPMs vary by daypart. Broadcast TV CPMs are determined by demand and limited supply, in which an increase in demand is augmented by a decrease in supply, thereby leading to higher CPMs. Cable is a bit different. Historically, as demand for cable increased, supply did as well, effectively muting some of the growth in cable CPMs; this dynamic though is starting to break as cable ratings decline and the total number of networks decreases.
Content is an important driver of a network’s ability to attract advertisers and raise CPMs as top shows can often earn many times the revenue for a 30-second spot that a lower rated show can command. Programming is critical on the cable side as well: the leading cable networks have distinguished themselves as those with the best-rated shows, and this leads to some pricing power in cable upfront negotiations. Over the years cable networks have invested in higher quality content, including original programming and sports, which has helped to narrow the CPM gap vs. network TV. Still, the pricing premium for broadcast has remained reflecting in our view network television's superior value as a short-term reach vehicle.
Advertisers have three opportunities to purchase TV advertising time: (1) upfront, (2) scatter, and (3) remnant. Advertisers work through media buyers at the agencies to negotiate placement and rates for their ads.
Figure 25: Cost of 30-second spots vs. Average Viewership - Select Shows $700.00 ) s 0
0 $600.00 SNF 0
n i
( $500.00 TNF This is Us
t o p $400.00 S
c e $300.00 Empire S Grey's Anatomy The Voice (Tues) The Big Bang Theory 0 3
f $200.00 The Voice (Mon) o
t
s The Conners
o $100.00 C $0.00 3 5 7 9 11 13 15 17 19 L+SD Viewership (in millions)
Source: Ad Age; Nielsen; Spotted Ratings; J.P. Morgan estimates.
2018/2019 was another positive From May through July every year, broadcast networks sell 75-85% of their ad space upfront for a 12-month period beginning in September (cable networks sell about 50-55% of their ad space upfront). In exchange for early commitments, advertisers get ratings guarantees and options to cancel their commitments during certain windows throughout the year. The media buyers negotiate these deals on behalf of the advertiser during this upfront process. In years of very strong demand for advertising space, the upfront selling season can be as short as a few days. In more “normal” times, the process lasts several weeks to over a month.
The 2014-15 TV broadcast season marked the first post-recession TV upfront decline for both cable and broadcast. Networks did not sell as much of their inventory as in
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previous years (CBS, for example, sold around 74%, down from a typical ~80%), potentially due to advertisers wanting to wait to buy spots closer to air time or shifting part of their budgets to digital. This, in turn, sparked a discussion around how much of advertisers’ more cautious approach to the upfront was temporary (perhaps due to macroeconomic factors) and how much was due to more secular effects from either viewership trends or the ongoing digital shift of advertising spend. These concerns were amplified following the 2015-2016 upfront, with volumes again light relative to history (CBS, we estimate, sold around ~69% of inventory) and CPM growth slowing to low-to-mid single digits. To the surprise of many industry watchers though, the TV ad market showed exceptional resilience in the back of half of 2015, which continued into the first half of 2016 leading to the upfront. As seen in Table 7 below, 2016-2017 was the first positive upfront in two years, and upfronts have since trended positive for three years. We attribute the strong gains in the upfront to three factors: 1) a shift from scatter into the upfront; 2) less inventory either due to ratings shortfalls or some networks cutting ad loads; and 3) an increase in budgets, partly helped by some large brand advertiser money shifting back from digital.
Even with the positive upfront, the scatter market has remained strong into 2019, with pricing upwards of 40% above upfront prices in primetime. TV in our view continues to benefit from some major marketers hitting the pause button on digital, as well as a decline in linear ratings which is creating a scarcity of inventory.
Table 7: Primetime TV Upfront Spending ($m) and Y/Y % Change Season Broadcast Cable Total Season Broadcast Cable Total 2006-2007 $9,140 $7,070 $16,210 2006-2007 2007-2008 $9,280 $7,250 $16,530 2007-2008 1.5% 2.5% 2.0% 2008-2009 $9,160 $7,600 $16,760 2008-2009 -1.3% 4.8% 1.4% 2009-2010 $7,745 $6,920 $14,665 2009-2010 -15.4% -8.9% -12.5% 2010-2011 $8,630 $7,950 $16,580 2010-2011 11.4% 14.9% 13.1% 2011-2012 $9,220 $8,690 $17,910 2011-2012 6.8% 9.3% 8.0% 2012-2013 $9,390 $9,275 $18,665 2012-2013 1.8% 6.7% 4.2% 2013-2014 $9,085 $10,110 $19,195 2013-2014 -3.2% 9.0% 2.8% 2014-2015 $8,680 $9,675 $18,355 2014-2015 -4.5% -4.3% -4.4% 2015-2016 $8,360 $9,450 $17,810 2015-2016 -3.7% -2.3% -3.0% 2016-2017 $8,750 $9,875 $18,625 2016-2017 4.7% 4.5% 4.6% 2017-2018 $9,105 $10,625 $19,730 2017-2018 4.1% 7.6% 5.9% 2018-2019 $9,630 $11,125 $20,755 2018-2019 5.8% 4.7% 5.2% Source: Media Dynamics and J.P. Morgan Estimates
Figure 26: Upfront Media Cancellation Schedule Period % Cancellable Cancellation Dates 1Q (Dec) 0% - 2Q (Mar) 25% Oct 15 - Nov 1 3Q (June) 50% Jan 1 - Feb 1 4Q (Sept) 50% April 1 - May 1 Source: J.P. Morgan estimates, MediaCom.
Scatter The scatter market is the sale of ad space that was not sold in the upfront market. It is sold on a shorter term basis. Supply and demand dynamics determine pricing, which is typically higher in the scatter market as it provides for short-term buying decisions, but ratings are not guaranteed. Scatter pricing is referred to in percentage premiums or discounts versus upfront pricing.
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In the first broadcast quarter (fourth calendar quarter), demand typically equals supply for advertising inventory on network TV, causing CPMs to be roughly in line with upfront pricing. In the second broadcast quarter (first calendar quarter), demand drops off a bit as advertisers do not spend much at the beginning of the year, post- holiday season. Supply is decent as a percentage of inventory sold in the upfront for this quarter and is not particularly high, and scatter market pricing may remain stable. In the third and fourth broadcast quarters (second and third calendar quarters), demand increases and supply decreases (sellout rates in the upfront for these quarters is typically higher than it is in the first half of the season, around 90%, which limits supply and hence tightens up the market). This causes scatter market pricing to typically sell at a premium to the upfront. This pattern is beneficial to the networks as it raises scatter market pricing going into the upfront negotiation period.
While this is a typical cycle, in reality, scatter market dynamics often vary (especially in recent seasons, as described below) as there are other factors affecting supply and demand such as audience deficiency units (ADUs). If ratings are particularly poor and fall short of guarantees, networks will eat into inventory (read: decrease supply) in order to offer advertisers the free air time owed to them, known as a “make-good.” This can tighten the market and, in turn, raise prices.
Coming out of the softer upfront in 2015/2016, scatter for the season was robust; pricing was up around 20% and several management teams described the environment as the best in years or ever. The strong market contributed to a better upfront in 2016/2017, though subsequent scatter remained positive, with pricing over upfront up over 20%. Since then, scatter has again remained strong. For the 2018/2019 season, some networks have reported primetime scatter pricing upwards of +40% above the upfront.
We note a continued decline in available inventory against relatively steady demand is likely helping tighten the scatter market. Weak ratings at some networks have led several into “make good” situations, forcing them to take some inventory out of the market to give to advertisers in order to make up for previous shortfalls in ratings versus the guarantees given in the upfront. This has naturally led to some tightening in the market. In addition, some media companies are potentially reducing the ad load on some of their networks, which has also helped reduce supply and tighten the market.
Remnant The unsold inventory after the upfront and scatter markets is sold as remnant. Advertisers purchasing remnant usually do not have specific marketing goals and are just looking for discounted space. In a strong market, this remnant space is generally limited to the early hours of the morning. Purchases are made on short notice, typically occurring one to seven days in advance.
Remnant advertising increased in the challenging ad environment of 2009 but declined rapidly in the recovery as the scatter market strengthened. We estimate remnant now accounts for about 10% of cable network advertising and upwards of 5- 10% on broadcast TV.
Measurement Advertising on TV is largely sold on C3/C7 ratings, which are provided by Nielsen. C3 stands for commercial viewership plus three days of time-shifted viewing (C7 is commercial viewership plus seven days of time-shifted viewing), meaning any
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commercial watched within three days of being aired is counted in the ratings. Advertisers purchase spots based on ratings (guaranteed in upfront purchases), so fluctuations in ratings will impact total advertising revenue to media companies. Given the significant shift in viewership over the past few years to digital platforms and beyond the three-day window, however, there has been an increasing focus by both media companies and advertisers/agencies for accurate cross-platform and extended time period measurement, which is important for both advertising dollar allocation decisions as well as media monetization across platforms. Nielsen’s Total Audience Measurement (TAM) product is the current leader in providing this measurement, in our opinion, although media companies and agencies/advertisers are also using additional third-party analytics and media companies’ own internal viewership data to support cross-platform ad buys.
TV Outlook for 2019 US TV ad revenues increased +4.6% to $65 billion in 2018 according to Magna. Excluding the roughly $3.1 billion in political and Olympic ad revenues in 2018, spending on TV was down -1.6% (national -0.7% and local -3.7%). 2019 will see a negative impact from the absence these biennial events in addition to the World Cup, though on an underlying basis we expect continued modest declines of around 1-2%, with national outpacing local. For national, we expect the decrease to be led by continued declines in linear ratings, only partly offset by higher inventory pricing. A wild card for 2019 will be viewership for the NFL, which rebounded +5% in 2018 following two straight years of declines. For local, management at broadcasters have guided to 2019 core advertising to be flat to up slightly, despite some continued softness in auto, which we view positively.
Digital Advertising capabilities on the internet and over mobile devices continue to rapidly expand and evolve. Magna has estimated that digital overtook television as the largest ad spend medium in 2016, and the gap between the channels is expected to widen as online growth maintains its outperformance. According to Magna, global digital and mobile advertising sales will grow by +13% y/y in 2019 and will attract half of the world’s total ad spending as early as 2019 or 2020. Most recently, eMarketer estimates that digital will surpass traditional ad spending in 2019, growing to two-thirds of total by 2023.Within the Internet category, JPM estimates mobile is now the largest platform, at around 65% of all US internet spending. Video and social networking – where mobile has seen the strongest growth - are the two key areas drawing major brand advertisers online, which is helping ad spending to catch up with consumer usage.
Facebook, Google, and everyone else. A key story for digital advertising is the continued dominance of Facebook and Google, with at least half of incremental digital ad spend going to platforms owned by the two companies. While there are numerous reasons to explain a duopoly in this space (superior products, more time- spent, better engagement, etc.), in our view the crucial competitive advantage comes down to the platforms' greater scale, data, and targeting abilities. Advertisers looking to reach any audience can find them on these platforms, and at granularity that usually doesn’t exist at other web publishers. Furthermore, campaigns can be more effectively measured, ensuring marketers that they are receiving a satisfactory ROI.
For traditional publishers, the dominance of FB and Google has created strain on business models, and has led to some consolidation of web platforms in order to create the scale necessary to compete (e.g. Time/Meredith, Group Nine Media).
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Publishers have also responded by emphasizing the need to have advertising placed against quality content, and in some cases online newspapers have pointed to the problem of "fake news" on social media. It's not clear though that “quality content” will be enough to get marketers to shift away from Facebook or Google; to the extent that digital marketing is about buying targeted audiences at scale, these platforms will likely to continue to capture an outsize share of digital growth.
Table 8: Net US Digital Revenue by Platform Net US Digital Ad Revenues ($b) % of Industry Incremental Growth Platform 2017 2018 2019 2020 Platform 2018 2019 2020 Google 34.9 41.3 47.9 55.1 Google 28% 31% 29% Facebook 17.4 22.9 27.6 32.6 Facebook 24% 22% 21% Amazon 1.9 4.6 7.2 10.9 Amazon 12% 12% 15% Microsoft 3.8 4.5 4.9 5.2 Microsoft 3% 2% 1% Oath 3.6 3.7 3.8 3.8 Oath 0% 0% 0% Twitter 1.2 1.2 1.2 1.3 Twitter 0% 0% 0% Snapchat 0.6 0.7 0.9 1.2 Snapchat 0% 1% 1% Yelp 0.8 0.9 1.1 1.2 Yelp 1% 1% 1% IAC 0.5 0.5 0.6 0.6 IAC 0% 0% 0% Hulu 0.4 0.4 0.5 0.5 Hulu 0% 0% 0% Roku 0.1 0.3 0.4 0.6 Roku 1% 1% 1% Other 23.4 30.3 36.3 43.7 Other 30% 29% 30% Total 88.4 111.1 132.3 156.7 Total 100% 100% 100% Source: eMarketer; J.P. Morgan Estimates
Ad buys vary by platform and different metrics may be used as well On Facebook, marketers pay for ad products based on the number of impressions delivered or the number of actions, such as clicks, taken by users. Marketers can also bid across a variety of metrics, making it an objectives based platform. Facebook’s reported overall price per ad (eCPM) normalizes across objectives, and represents the effective price paid per impression regardless of the objective. Facebook also has a variety of ad formats, with the recent addition of Instagram stories ads and Facebook Watch video ads.
For Google, the company reports paid clicks growth and cost-per-click (CPC) growth. Paid clicks are clicks on advertisements related to searches on Google or on other owned platforms like Gmail, as well as YouTube engagements when viewers do not skip the ad. Advertisers pay on cost per click, defined as click driven revenues divided by total number of paid clicks. In effect, cost per click represents the average amount Google charges for each engagement from users.
On Twitter, marketers pay for engagement, which is defined as a user interaction with a pay-for-performance advertising product. The engagements are objectives based, meaning a user needs to complete the objective set by an advertiser such as retweeting, in order for the interaction to count as an engagement. Cost per engagement (CPE) is then the average price of all ad engagements. The largest ad format on Twitter is video.
Amazon’s ad revenue has also scaled rapidly, growing from $1.8b in 2015 to more than $8b in 2018. Amazon offers three types of inventory: sponsored products, sponsored brands, and product display ads, which mainly vary on placement within the website and their availability on different devices. All of these products are transacted on a cost-per-click basis, with sponsored products comprising of 80-85% of the advertising revenue.
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Overall, JPM Internet Analyst Doug Anmuth expects 2019 FXN ad revenue growth of 26% for Facebook, 21% for Google Properties, 16% for Twitter and 45%+ for Amazon.
Viewability, fraud, measurement, and brand safety remain concerns for larger marketers looking to increase digital spend. Each of these present challenges for both marketers and content owners, and, in our view, will need to be worked out for digital to continue to attract incremental spend, especially from television. We further believe these issues have been partly responsible for the move of some dollars back to traditional media, mainly from lower quality digital inventory (e.g. P&G shifted $200m away from digital media in 2017). We estimate that television has been able to benefit from strong pricing power partly because of loyalty from big consumer brands in CPG/FMCG sectors that value the reach, brand safety and transparency of traditional linear TV. While brand safety remains a concern for major advertisers, highlighted by a recent YouTube boycott, we believe it is less of a factor for small and medium enterprises, which continue to allocate incremental spend to digital platforms.
TV and Digital blend - examining the vMVPD advertising model Virtual MVPDs continued to grow subs in 2018, supported by the ramp at Hulu Live and YouTube TV, although some players like DirecTV Now have started to plateau or lose subscribers due to a strategic shift to focus on profitability. In total, JPM estimates 3m net subscriber adds for the year, with growth expected to slow to 2.4m in 2019. Given the limited gross margins of virtual MVPDs and cost escalators built in programming contracts, we believe the sustainability of current retail prices depends partly on developing a viable advertising model. Based on conversations with industry contacts, we'd describe the platforms as a work-in-progress, with development so far challenged by technical and operating hurdles. As a base line, we think the goal for virtual distributors is to achieve advertising revenue per sub at least in-line with legacy cable and satellite providers (we estimate at $9/month), and likely higher given the potential for more targeted advertising.
The services are provided the same 2 minutes per hour that are normally allocated to legacy distributors. In the case where a platform includes Cloud DVR, the vMVPD could potentially insert fresh advertisements into recorded content, subject to restrictions. Finally, the virtual service is likely to have some video-on-demand inventory.
Platforms with legacy owners, such as Sling or DTV NOW, can lean on existing linear operations in order to directly sell the 2 minute allocation. DISH and DirecTV are also established players in dynamic ad insertion, having operated scaled businesses, which replace advertisements in subscriber DVRs. We believe this expertise provides an incumbent advantage, at least relative to cable or telecom operators, which might enter the space. Hulu Live and YouTube TV meanwhile are likely to leverage infrastructure built up to support existing video-on-demand services.
We note that some of the challenges faced by vMVPDs also apply to AVOD players, including platforms such as Pluto TV, ET Live, and Crackle. AVOD services must also achieve scale and build up a subscriber base in order to monetize advertising inventory. Based on conversations with industry participants, we believe that ad sales is the biggest challenge faced by AVOD as it’s unclear what buyer would be most attracted to AVOD services (i.e. does it pull marginal dollars from TV or digital). So
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far, many AVOD players have not been able to monetize inventory to the fullest extent, which we believe is one factors that led Viacom to acquire Pluto TV as the service complements it AMS business.
Figure 27: U.S. Internet Advertising Share by Format, 2018
Social media Internet display 21% 21%
Podcast 0% Internet radio 3% Internet video/rich media 18% Paid search 32% Internet classified 5%
Source: Zenith, March 2019
Agencies continue to build their Agencies continue to bolster and acquire capabilities aggressively in digital digital media capabilities marketing as advertisers look to shift spend into this more measurable channel (to date print has been the main loser in this shift). The holding companies provide a full suite of creative and media services, akin to traditional media. Services offered include strategy, research, planning, analytics, website development and maintenance, and technology enablement.
Digital media buying has been a key focus of investment into areas such as programmatic real-time display buying over exchanges through dedicated trading desks. Along with behavioral targeting (the use of user data) and real-time bidding, an agency can follow a target audience and serve ads to that person regardless of what website they visit. The agencies like to call this “buying audiences” rather than buying media properties, and these cost-effective aggregators of audience have often contributed to price erosion of single-website properties. We see the continued evolution of data, social media, video, and mobile as the key drivers to agency growth.
Figure 28: Internet Ad Spending by Quarter, 1996-Q318 $ in millions
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Source: Interactive Advertising Bureau (IAB), PricewaterhouseCoopers, J.P. Morgan.
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Digital Outlook for 2019 JPM’s Internet team expects online ad spend to increase 17% in 2019, with growth led by mobile and video. Desktop is forecast to continue its decline, with decreases in search and banner more than offsetting an increase in video.
Table 9: JPM Internet Team Advertising Forecasts
By Platform Desktop Desktop Search 11,666 14,757 16,915 18,490 18,940 20,486 17,782 18,536 18,907 18,812 18,530 Y/Y growth 26.5% 14.6% 9.3% 2.4% 8.2% -13.2% 4.2% 2.0% -0.5% -1.5% Desktop Banner 8,229 9,235 9,699 10,024 10,145 9,689 8,717 9,077 8,623 8,365 8,197 Y/Y growth 12.2% 5.0% 3.3% 1.2% -4.5% -10.0% 4.1% -5.0% -3.0% -2.0% Desktop Video 1,406 1,809 2,304 2,819 3,338 4,169 4,940 5,618 5,955 6,134 6,257 Y/Y growth 29% 27% 22% 18% 25% 18% 14% 6% 3% 2% Desktop Other 4,088 4,348 4,308 4,175 4,666 4,365 4,518 4,988 4,718 4,529 4,484 Y/Y growth 6.3% -0.9% -3.1% 11.7% -6.4% 3.5% 10.4% -5.4% -4.0% -1.0% Total Desktop 25,390 30,149 33,226 35,508 37,088 38,708 35,957 38,219 38,204 37,840 37,468 Y/Y growth 18.7% 10.2% 6.9% 4.4% 4.4% -7.1% 6.3% 0.0% -1.0% -1.0% % of total Online Advertising 97.5% 95.0% 90.9% 83.0% 75.0% 65.0% 49.5% 43.3% 36.1% 30.6% 26.4% Mobile Mobile Search 5,934 9,171 16,793 22,064 28,021 33,625 39,341 Y/Y growth NA 54.5% 83.1% 31.4% 27.0% 20.0% 17.0% Mobile Banner 9,379 13,571 18,423 25,792 32,240 38,688 Y/Y growth NA 44.7% 35.8% 40.0% 25.0% 20.0% Mobile Video 1,667 3,986 6,282 10,051 15,579 21,031 Y/Y growth NA 139.1% 57.6% 60.0% 55.0% 35.0% Mobile Other 371 625 2,333 3,278 3,901 4,565 5,249 Y/Y growth NA 68.6% 273.1% 40.5% 19.0% 17.0% 15.0% Total Mobile 651 1,587 3,346 7,273 12,363 20,843 36,683 50,047 67,765 86,009 104,310 Y/Y growth 143.7% 110.9% 117.3% 70.0% 68.6% 76.0% 36.4% 35.4% 26.9% 21.3% % of total Online Advertising 2.5% 5.0% 9.2% 17.0% 25.0% 35.0% 50.5% 56.7% 63.9% 69.4% 73.6% Total Online Advertising $26,041 $31,736 $36,572 $42,781 $49,451 $59,551 $72,640 $88,266 $105,969 $123,849 $141,778 % Y/Y growth 14.9% 22% 15.2% 17.0% 15.6% 20.4% 22.0% 21.5% 20.1% 16.9% 14.5% Online as % of Total US Advertising 15.2% 18.2% 20.4% 23.5% 26.4% 31.1% 35.7% 42.8% 47.8% 54.5% 60.2% Y/Y change (bps) 137 301 220 309 287 473 460 706 500 670 566 Total US Advertising $170,944 $173,944 $178,868 $181,791 $187,277 $191,240 $203,242 $206,249 $221,718 $227,261 $235,669 %Y/Y growth 4.6% 2% 2.8% 1.6% 3.0% 2.1% 6.3% 1.5% 7.5% 2.5% 3.7% Seasonality 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% By Format Search 11,666 14,757 16,915 18,490 24,874 29,656 34,575 40,600 46,928 52,438 57,872 Y/Y growth NA 26% 15% 9% 35% 19% 17% 17% 16% 12% 10% Banner 19,068 22,288 27,500 34,415 40,605 46,885 Y/Y growth NA 17% 23% 25% 18% 15% Video 5,836 8,926 11,900 16,006 21,713 27,288 Y/Y growth NA 53% 33% 35% 36% 26% Others (classified, lead gen, Audio…) 4,088 4,348 4,308 4,175 5,037 4,990 6,851 8,266 8,619 9,094 9,733 Y/Y growth NA 6% -1% -3% 21% -1% 37% 21% 4% 6% 7% Source: J.P. Morgan estimates.
Audio While this medium lacks the visual capabilities and effects associated with other media, audio appeals to the imagination, which highlights the importance of ad frequency to generate the desired response. Radio cost effectively targets geographic markets, typically on a local basis, while podcasts have grown in recent years as another channel to reach consumers. Advertisers also like audio’s low media and production costs compared to television.
Radio advertising is similar to TV in that advertisers can make network, national spot, and local spot buys. The majority of advertising on radio is local (about 90%), with roughly 10% on network, satellite, and national spot radio. Like television, radio advertisements are also placed by daypart, with the largest audiences tuning in during the early morning and late afternoon drive times. Radio advertising is heavily influenced by radio ratings (such as those provided by Nielsen Radio) as advertisers
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target listeners based on these ratings and as radio stations set rates according to daypart and program popularity.
Radio is one of the fastest ways to get a message out to a consumer at a local level. The lead time to get an advertisement on radio is short since there are limited production requirements, making it a medium that reacts quickly when the advertising market changes. Sales are usually made one to four weeks in advance for this medium (although they can be accomplished in as few as two days), providing a little less visibility than TV. Radio is often used by smaller advertisers looking for good value and the benefits of radio, quick turnaround and low production costs. This renders local radio relatively better off than national as large national advertisers look more to TV for their branding.
More recently, podcasts have gained popularity as the use of mobile devices surges. New York Times' The Daily has grown a substantial following of 2m daily listeners, podcast Dirty John has been turned into a hit series on Bravo, and Spotify is moving aggressively into the podcast space through acquisitions of podcast producers. For Spotify, this strategy is likely driven by a need to differentiate itself versus other streaming services, and create some operating leverage in its model (given the fixed cost of podcasts relative to music).
Audio Outlook for 2019 Growth in traditional radio was down -2.7% in 2018, according to Magna, with declines in the larger local market more than offsetting a slight gain for national. Digital revenues for radio station owners continued to be a bright spot, with ad spend up an estimated HSD bringing the total decline to around -1%. In general, radio faces increasing competition for listeners from streaming services and commercial free satellite radio. At the same time, we believe marketers continue to shift spend to digital channels, given the similar targeting benefit of that medium. While we expect advertisers will take advantage of radio’s expanding digital offerings and live events, we believe this will only partially mitigate what is likely to be a low to mid-single- digit decline in core network and spot advertising. Overall, we look for radio to be down -2% to -4%. Podcast advertising is forecast to grow to more than $500m in 2019 and more than $650m in 2020, from $400m in 2018 according to the IAB.
Newspapers Print newspapers allow advertisers to penetrate local markets using text- and graphics-based advertising. Print newspaper advertising formats include the following:
Graphics (Run-of-Press, or ROP). Graphics/ROP ads are favored by retail companies, wireless carriers, political campaigns, etc. Ads come in different formats (e.g., half page, full page), in black and white, or, in color. Classifieds. Ads for automobiles, help-wanted, real estate, or other items for sale. Promotions. Promotions, such as coupons and preprinted inserts (FSIs), are produced by newspapers or third-party marketing companies.
Much of newspaper advertising’s appeal reflects the ability to tailor ads to local markets as the majority of newspapers cater to local populations (with the exception of more national papers such as The Wall Street Journal, The New York Times, and USA Today). Ad sales are typically made two to four weeks in advance of publication, although regular advertisers such as department stores and auto dealers
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often negotiate packages for up to a full year’s worth of advertising. Classified sales have a shorter lead time, at about one to two weeks.
Newspapers have suffered from digital competition, and the outlook has continued to remain volatile as print advertising revenues fall faster than publishers can cut costs and boost digital advertising sales. In 2018, newspaper advertising spend accounted for approximately 7% of total U.S. advertising expenditures, down from about 28% in 2007, according to Zenith.
Digital continues to be the more meaningful growth driver of newspaper revenues In order to capitalize on the significant growth opportunities in digital, many publishers have developed partnerships or have formed syndicates focused on capturing more ad revenues in a cost-efficient manner. On a national basis, digital advertising revenue reached 20% of total newspaper ad revenues in 2016, according to SNL Kagan. Additionally, we highlight that digital advertising accounted for 46% and 33% of NYT’s and GCI’s newspaper ad revenue in 2018, respectively.
Some of the premium newspaper brands saw a decline in online advertising revenues in recent years, partly due to the glut of Web ad inventory and increased use of programmatic automated ad-buying systems that has put downward pressure on prices. In an effort to combat the abundance of ad inventory, companies like NYT are creating new advertising formats, including native advertising, articles and videos created for advertisers that run alongside editorial content. Spending on native advertising in the U.S. is expected to increase to roughly $44b in 2019, according to research firm eMarketer. Some digital newspapers, like the NYT, have also quickly adapted from a desktop model to mobile which has impacted advertising demand.
Newspaper Outlook for 2019 We expect newspaper industry advertising (print and digital) to be down in the mid- to-high single digits in 2019 as advertisers continue to shift spending away from newspapers toward other media and readership trends remain under pressure. Outliers to this trend include publishers with successful digital subscription strategies that can capitalize on their brands and an unprecedented news cycle; for instance, we model NYT total advertising in 2019 at flat y/y, comprised of a -6.5% decrease in print and 8.6% increase in digital. For the industry, we expect declines in print advertising in the double-digit to mid-teens range and expect newspaper advertising share to decrease to close to 5%. We believe digital advertising growth will likely continue to be positive, up low-single digits in 2019, although we continue to be wary of digital advertising still not being big enough to offset print declines amongst the publishing community.
Outdoor Outdoor is reaching a broad audience and benefiting from accelerating digital growth Outdoor is a mass medium that reaches a general audience with a concise message in a selected geographic region. Outdoor advertising includes billboards, street furniture (e.g., bus shelters, park benches), transit advertising, and alternative outdoor areas such as stadiums and arenas, airborne vehicles, marine vessels, beaches, ski resorts, golf courses, bicycle rack panels, gas pump panels, rest areas, ad panels on top of taxi cabs, etc. Billboard advertising comprises the bulk of outdoor advertising available in the US, capturing ~60% of total revenue. Billboard advertising has
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typically been sold for long-term periods (6 to 12 months), although with conversions to digital, the time frame can be much more targeted (e.g., temperature threshold) and short-term, and the landlord often times does not own the billboard structure on the plot of land or sell the advertising on the billboard. Meanwhile, most street furniture and transit advertising deals are locked up under multiyear contracts that vary by city with outdoor advertising companies responsible for selling advertising across the assets. Advertising on these transit sites are often short-term.
Longer-term, we see the Outdoor space as one of the more attractive subsectors within Media as the medium is maintaining and even slightly growing market share as companies convert their static assets to digital with increased analytics and targeting capabilities that are attractive to advertisers. With this significant transition, we anticipate the rising adoption of digital billboards/transit/other public screens to fundamentally change the overall industry over time. Technology continues to advance, and improvements are leading to the industry’s first-generation digital screens replaced by lower-cost, more sophisticated, and longer-lasting second generation digital screens. The new opportunities from data-driven dynamic campaigns to right-time marketing make Outdoor a key part of digital advertising campaigns, providing new potential for advertisers. In addition, the subsector's key growth drivers of 1) increasing urbanization, 2) increased commute times, 3) rising passenger numbers across the globe and 4) increasing fragmentation of the Media landscape (with Print losing audience) remain strong. Long term, we believe further opportunity lies in Outdoor taking ad budgets not only from competitors’ advertising channels that are impacted by changes in consumption patterns such as Print, but also from budgets allocated to Digital, thus providing future margin upside.
The Outdoor share clearly differs widely across different geographies The Outdoor share in overall Media differs widely across different markets and is especially high in Asia, particularly Japan and China with JCDecaux owning key contracts in the region. We believe the company’s relatively high exposure to two of the three leading markets for digital advertising (China and UK) positions it to benefit from increasing demand for digital OOH. Meanwhile, in the U.S., Outdoor share of overall ad budgets has remained relatively constant over the past few years (with declining Print ad budgets shifting toward digital) at ~6%. However, we believe the increasing convergence of Outdoor and digital advertising, in addition to new programmatic trading optionality, offers potential for the ad share to increase over time. M&A is also likely to gain in importance in the sector.
Figure 29: Share of outdoor advertising in total ad budgets 13% 14% 12% 12% 11% 11% 12% 10% 10% 7% 8% 6% 6% 6% 6% 6% 6% 6% 5% 4% 4% 5% 4% 4% 2% 0% World North America Latin America China Japan Western Europe France UK Germany 2010 2016 2019E
Source: JPM estimates
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Digital continues to revolutionize the industry The application of digital technology, such as video and wireless interaction, is expected to drive growth over time, although trends have been somewhat lumpy given the volatility in advertiser allocations as viewership across media continues to fragment and advertisers search for the highest ROI platforms with the least brand risk. Several initiatives are underway to transform the outdoor industry. Technology is allowing the industry to become more interactive and increase user engagement, better capitalizing on its ubiquitous attribute. The traditional static poster is being replaced by those with interactive TV, website, gaming consoles, etc. Many exhibits are also now employing more socially engaging formats. The proliferation of smartphones is another opportunity for outdoor to customize messaging and leverage social media.
Figure 30: What kind of messages do consumers want on digital screens? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Messages Messages Messages Messages Messages Messages relevant to relevant to relevant to relevant to relevant to a relevant to a your location the day of the the weather the time of seasonal live sporting week day event event
Source: OAAA
Digital deployment continues to accelerate. The Outdoor Advertising Association of America (OAAA) estimates that there are now roughly 8,800 digital billboards and 7,850 digital transit faces in the U.S. The pace of deployment is expected to remain robust in coming years, with several hundred new boards being added annually and both Outfront (OUT) and Lamar (LAMR) looking to continue converting static billboards to digital. Digital comprised ~41% of total US outdoor ad spending in 2018, according to PwC, and is expected to grow to nearly 48% share in 2022, implying that essentially all growth in the US outdoor market will be from digital rather than traditional outdoor media. Further, digital outdoor advertising is expected to grow 10% per year between 2018 and 2021, according to Warc.
Technology companies fueling outdoor media’s growth Four of the ten largest spenders on billboards in 2018 were technology firms: Apple, Google, Amazon, and Netflix. Overall, fourteen technology brands increased spend on outdoor media by double digits in 2018. Technology companies are leveraging outdoor media as a valuable source of advertising, which can’t be skipped, compared to banner ads, pre-video commercials, or other ad-blocking mechanisms, and is less susceptible to fraud. Digital billboards are often used to drive a consumer action, driving immediate customer engagement either through a Facebook page or viewing of a video. Digital outdoor advertisements have become a key component to a marketing strategy, augmenting mobile, social, retail, and other channels.
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Smart technology and programmatic advertising unlock new opportunities Looking ahead, we see the shift to digital unlocking many new opportunities with programmatic advertising and the use of smart technology. With programmatic advertising, some platforms enable advertisers to purchase mobile ads and digital outdoor units for an integrated campaign. Advertisers are able to utilize a wealth of information by using internet-connected screens, and external data feeds from digital advertisements, in real time. Outdoor campaigns benefit from data-driven analytics to provide better results, exploring audience profiles, purchasing habits, weather conditions, road traffic, and other information. Further, the use of smartphones may enable advertisers to look into location-based data for more precise targeting and measurement, although privacy issues may be an impediment. Digital screens also have the capacity to act as extensions of online video campaigns from the digital world in the real world. The additional insights leveraged from digital are driving higher CPMs for the medium, and in turn, fueling the industry’s investment in digital expansions.
Figure 44: Outdoor expected to maintain market share through 2021 100% 6% 6% 6% 6% 90% 6% 6% 2% 4% 4% 3% 3% 2% 6% 6% 5% 80% 10% 9% 7% 70% 60% 37% 40% 43% 46% 48% 51% 50% 40% 30% 20% 37% 36% 35% 34% 33% 32% 10% 0% 2016 2017 2018 2019E 2020E 2121E
TV Digital News Mags OOH
Source: OAAA, MAGNA.
Outdoor Outlook for 2019 Total outdoor advertising grew 4.6% in 2018, with traditional out-of-home flat and digital growing 17%. This growth was slightly better overall than the past few years (total outdoor advertising grew 2% in 2017 with traditional out-of-home growing 1% and digital growing 12%; total outdoor grew 4% in 2016 with traditional growth of 1.5% and digital growth of 14%). We expect a similar acceleration of growth this year as the industry benefits from a healthy ad environment with increased investment in digital. In the U.S., we expect 2019E traditional out-of-home to be flattish y/y and digital to grow 18% for combined total growth of ~4.5%. On a global basis, Zenith expects total outdoor advertising to grow by ~3.5% in 2019E and ~4% in 2020E and share of global ad spend to remain stable at ~6.5%.
Cinema Cinema advertising refers primarily to the ads that run before an in-theatre movie starts. Advertisers generally like this form of advertising because it captures a consumer’s undivided attention in a highly engaging premium video format, and we believe the value has increased in an environment with ongoing fragmenting viewership with some consumers also becoming accustomed to ad-free content. Studies by Arbitron have noted that young consumers aged 12-34 found cinema ads more acceptable than ads on TV or other mediums and further demonstrated greater recall, implying that cinema advertising is an effective way to reach an audience. Meanwhile, trends in cinema advertising have been somewhat volatile over the past
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couple years. National CineMedia, the largest player, had +3.5% y/y ad revenue growth in 2018 (domestic industry box office growth +7.4% y/y) following ad revenue decline of -5.4% in 2017 (domestic industry box office decline -2.7% y/y), demonstrating the significant impact of the overall film slate on this advertising medium, especially as cinema’s share of ad dollars remains quite small at ~0.5%.
Core categories in recent years have included auto, beverage, entertainment, and telecom, and newer entrants include financial services, food, and CPG. Cinema ad dollars compete mostly with TV, which serves as a benchmark reference for pricing. The cinema ad market is essentially split between two companies, National CineMedia (NCMI) and Screenvision (owned by private equity firm Arby Partners), which enter into long-term exclusive contracts with the movie theater chains to run ads before the movie previews begin. National CineMedia has the edge in market share with over 20-year contracts with the top three chains: Regal Entertainment, AMC, and Cinemark, as well as shorter contracts with many others. Cinema has historically been more volatile as a more sensitive medium to any advertiser budget pullbacks, and we believe exhibitor’s ongoing conversions to recliners/reserved seating may lead to consumers getting to the theaters later, presenting a headwind to ad spend. We also note that NCMI and Screenvision attempted to merge in 2014; however, the deal was blocked by the DoJ.
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The Advertising and Marketing Services Company
In this section, we look at the typical agency holding company, examining the split between advertising and marketing services, the components of each, and providing some insight into how each of these businesses works.
Composition of revenues at an Advertising and marketing services companies are typically composed of advertising and marketing approximately half traditional advertising and half marketing services. In past years, services company the big holding companies moved aggressively into developing their marketing services offering as they sought both diversification and the higher growth rates these businesses often provided. More recently, we’ve seen a pullback in this trend, with some agency groups divesting businesses deemed as non-core, including OMC (Sellbytel, Novus, MarketStar), PUB (Publicis Health Services), and WPP (Kantar).
Revenues in traditional advertising are broken out between creative advertising (about 30% of the total) and media planning and buying (about 10-25% of the total). Marketing services is comprised of customer relationship management (CRM), about 35% of total revenues on average; public relations (PR), some 5-10% on average; and specialty/other communications, about 10-15% on average.
Figure 31: Advertising and Marketing Services Company Revenue Breakout
CRM - 35% Creative - 30%
Advertising Marketing 45% Services 55% Media Buying - 15% PR - 10% Specialty - 10%
Source: J.P. Morgan estimates.
Traditional advertising Traditional advertising involves three distinct activities: creating advertisements, planning ad campaigns and strategies, and buying ad space in media outlets. Creative advertising is the actual conception and production of advertisements. Media planning is the research and evaluation of advertising placement strategies. Media buying is the negotiation and/or execution for the placement of advertisements. The evolving digital landscape also adds nuances that include non-paid media such as social campaigns/profiles and app and website development that still require meaningful marketing resources to execute (revenues to the agencies).
The advertising and marketing services holding companies have multiple creative agency networks. The idea behind this diversification was to initially1) avoid client conflict (less of an issue today) and 2) provide a more diverse creative offering. With only one agency network, the holding company may be limited to just one client in each industry as there is still sensitivity in most industries that prompts companies to forbid the advertising agency to work with a competitor. Many advertisers don’t
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mind, however, if a competitor is represented at another agency within the same holding company. Furthermore, having many agencies boosts the chances of winning more business that is up for review as the creative reputation or flavor may differ from one agency to another. For a public company, there is also less volatility in a holding company that has more than one agency network because if one agency falls out of favor for a while, the others can still help contribute to growth.
Media planning is often coupled with media buying, but the two need not work together. Ad companies can run their media planning and buying operations as separate entities. In addition, many large advertisers have their own media planning divisions and therefore use advertising companies only for creative and media buying work. Media planning usually involves close interaction with the creative teams as well to produce a well thought out, comprehensive ad campaign.
Many years ago, agency networks each housed their own creative and media planning and buying divisions. As the holding company structure evolved and grew, the media buying functions were extracted from within the agency networks and combined into one large media buying unit. The reason behind this move was the idea that scale really matters in the media buying business. Increased dollars under the media buyer’s control give it more leverage in negotiating pricing or placement of a client’s advertisement. Just as important today is scale in data and analytics, which allows the largest media agencies to execute digital campaigns more effectively. The holding companies have configured their structures such that a powerful media buying arm is positioned to draw media buying business, often performing the service on behalf of the holding company’s own traditional creative agencies, which promotes their specialization and streamlines the entire process.
Advertisers often prefer to keep all functions within the same advertising company as this can enable increased communication and coordination of ad campaigns. In practice, though, the three activities are quite distinct, and some advertisers prefer to use different agencies and even different holding companies for their creative and media planning and buying work. Some advertisers may maintain accounts with different agencies or advertising companies because of client conflict issues or simply because they have good relationships with different creative and planning and buying companies.
The top 10 global advertising agencies are listed in the figure below.
Figure 32: Top 10 Worldwide Advertising Agencies by Revenue, 2017 $ in millions Rank Agency Network Global Revenue, 2017 1 Dentsu $2,302.30 2 BBDO Worldwide (OMC) 1,952.8 3 DDB Worldwide (OMC 1,739.8 4 TBWA Worldwide (OMC) 1,437.7 5 McCann (IPG) 1,417.1 6 Hakuhodo (Hakuhodo DY Holdings) 1,359.0 7 Y&R (WPP) 1,152.5 8 JWT (WPP) 1,116.6 9 Ogilvy (WPP) 990.1 10 Grey (WPP) 751.2 Note: 2017 latest available. Source: Advertising Age.
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Creative Advertising Creative agencies design and produce advertisements to be placed in media outlets. The creative work itself involves the conceptualization, production, and presentation of an advertisement. The ad concept involves an understanding of the product or service offered, the marketplace and competition for the product or service, and the target market before developing a campaign theme and producing ad copy or recorded material to support this theme. This work may be supported by media planning.
Depending on the medium selected, the lead times required to prepare creative campaigns will vary. TV ads can require several months of planning and preparation, while digital execution can be much faster, and, therefore, marketers will often employ in-house production staff to ensure a steady stream of online and social content.
Media Planning Media planning is often the first step in developing an advertisement, involving the evaluation of potential media and determining which will be the most effective and cost-efficient way to deliver the client’s message. Indeed, over the last few years, we have seen more focus on the central role of media planning given the increased freagmentation of audiences across new media. More advertisers have consolidated their media planning and/or media buying accounts with one regional or global agency, which can then better manage brand image and placement.
Media planning involves significant research into target consumer behavior and into pricing of different media at different times, with the goal of delivering an advertisement with the greatest coverage and reach. Two broad metrics are used in assessing delivery of the selected media:
Reach. Reach is the percentage of the target population that is exposed to the message at least once. Frequency. Frequency represents the average number of times the target is exposed to the message. To sell a product successfully, media planners research the product’s merits and utilize first and third party data sets to segment the target market. Researchers also analyze competing products and competing product advertisements, as well as the general economic environment, in order to best position the product in the marketplace. The goal is to create a brand image and establish a process of communicating this image.
Media planners also work with their clients to evaluate options for the placement of the advertisement, including:
which media to use—for example, TV, search, online, social, mobile, radio, print, outdoor; for digital—what platforms to utilize, including Facebook, Google search, YouTube, Amazon, Twitter, tail programmatic, etc. for TV—what genres to focus on, whether to target local or national audiences, when to run the ads
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Media Buying Traditional media buying consists of national and local broadcast purchasing where buyers negotiate programming and pricing packages on behalf of their clients. Buyers then monitor the programs and follow up with a comparison of completed campaign results against the original advertising plan. Digital media buying consists the execution of a campaign across online platforms, with the strategy often adjusting in real-time based on incoming data.
Media buying has become increasingly important in its own right as the choices and costs of media available to advertisers continue to change. Buying specialists have the scale necessary to demand the most coveted advertising space and best prices from media owners. On the digital side, media agencies remain apprised of the latest trends in ad-tech, and maintain relationships with vendors at all points of the value chain, using their leverage to the benefit of clients. As a result, marketers typically consolidate global media buying with one or a handful of agencies, in contrast to creative where campaigns can be allocated on a brand by brand basis.
Agencies serve as the pass-through vehicle for advertising budgets and generally take a small cut (around 1-4%) of the total. The large amounts of spend handled by media buyers require careful cash management and can often lead to volatility in working capital for holding companies. Media accounts have made up the bulk of account moves recently, largely driven by the significant shift of ad spend to digital, which has led to marketers to re-evaluate their incumbement relationships. In general, we believe pricing pressure is increasing in the media buying business as consolidated accounts have more bargaining power and media buyers may be willing to come down a bit on price to secure a prestigious and lucrative new account.
We estimate media buying/planning comprises roughly 25% of revenue at Publicis and WPP, 15-20% at Omnicom, and 10-15% at IPG. We also believe margins within media tend to be slightly higher than in creative, given lower staffing needs and ability to scale. Prominent media buyers and their parents are listed below.
Figure 33: Top 10 Worldwide Media Agencies by Revenue, 2017 $ in millions Rank AGENCY [PARENT] Global Revenue, 2017 1 Wavemaker (WPP) $1,535.80 2 Mindshare (WPP) 1,422.70 3 Mediacom (WPP) 1,311.40 4 OMD Worldwide (OMC) 1,280.40 5 Carat (Dentsu) 1,275.90 6 Starcom (PUB) 1,047.00 7 Havas Group Media (Vivendi) 951.5 8 Zenith (PUB) 896.8 9 PHD (OMC) 694.3 10 UM (IPG) 560.2 Note: 2017 latest available. Source: Advertising Age.
Programmatic Explained Media buying is changing rapidly, particularly as dollars move to digital (estimated to now make up ~45% of total global ad spend), and more importantly as digital ads are bought and sold on a programmatic basis. According to eMarketer, programmatic
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digital display ad spending will reach more than to $57 billion in 2019, up ~20% from 2018, and comprise over 84% of total digital display ad spending (excluding search). Strong growth, albeit at decelerating rates, is expected to continue for the next few years. For agencies, programmatic remains a relatively small portion of overall revenues, but this is expected to continue to grow as both digital increases as a total percent of ad spend and programmatic increases as a percent of digital.
Figure 34: US Programmatic Digital Display Ad Spending, 2016-2020E $ billions, %
$75.0 100% $68.9 $70.0 90% $65.0 $60.0 $57.4 80% $55.0 70% $50.0 $47.4 $45.0 60% $40.0 $36.3 50% $35.0 $30.0 $25.9 40% $25.0 30% $20.0 $15.0 20% $10.0 10% $5.0 $0.0 0% 2016 2017E 2018E 2019E 2020E
Programmatic digital display ad spending % chg % of total digital display ad spending
Source: eMarketer, Oct. 2018.
We believe that fears of disintermediation from either in-sourcing, ad-tech firms, or the so-called “Walled Gardens” such as Facebook or Google are unfounded. Before addressing those concerns, it is necessary first, though, to understand how programmatic works and the agency role in the process.
Programmatic Buying Explained WPP’s Xaxis has defined programmatic buying as “An automated method of buying digital advertising driven by data and technology.” It is important to note the definition does not include real-time as inventory can be bought and sold in advance. The differentiating factor of programmatic is not that inventory is purchased on an instant basis but that the purchases are made on an automated basis, as opposed to the traditional method of directly contacting a publisher’s sales force to buy ad space.
With programmatic, media buyers often refer to buying audiences as opposed to buying media. The goal is generally to use data to put the “the right ad, in front of the right person, at the right time.” Data utilized include browsing history (cookies), historical purchase data, contextual data (time of day, geography, browser used, device used), as well as the publisher and advertiser’s own primary data. So, for example, if data determine that a female, using an Apple product (more upscale), who has recently browsed websites for handbags and even left unpurchased but filled carts at the Coach online store is now reading an article on NYTimes.com, then it would be in the interest of Coach to deliver an ad programmatically to that site at that moment offering a promotion.
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A key advantage of programmatic is that ad campaigns can be adjusted in near real time, with brands continuously checking to see how many clicks an ad is getting or how long viewers are watching a video before scrolling away. This is in contrast to a traditional campaign where data has to be collected and adjusted over a period of time. Adjustments can take a creative form, such as altering an ad to be more attention grabbing without sound, or tactical, as in fine-tuning targeting criteria.
On the next page, we illustrate how a real-time programmatic buy actually works. We note a simple search on the web for this topic will produce a slew of diagrams trying to explain this, with some enormously complicated. We see these complex charts as misleading and note that all programmatic impressions have five key steps that we map out.
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Figure 35: 5 Steps in a Programmatic Impression MediaOwner.com
Major Players Step 1: MediaOwner.com’swebpage loads. The site’s CMS DoubleClick (Google), AppNexus, sends a request to a publisher ad server to load a display ad. 1. Publisher Ad Server OpenX, AdJuggler, FreeWheel The publisher ad server makes a request to both direct sold ads and ad exchanges.
Step 2: Upon notification from the Publisher Ad Server, the PubMatic, INDEX Exchange, OpenX, Ad Exchange conducts an auction for the display ad. 2. Ad Exchange YuMe, Smaato, Google, FB, Aol, Requests are sent to bidders representing advertisers. YHOO, AppNexus, Rubicon Project
Step 3: The bidder, a demand-side platform (DSP) or ad The Trade Desk, MediaMath, Turn, network, receives bid request and looks for campaigns on its 3. Bidder Rocket Fuel, Criteo, Google, FB, Aol, platform. It then sends the Ad Exchange a bid on behalf of YHOO, AppNexus, Rubicon Project advertiser. Exchange then collects bids and chooses a winner.
Step 4: Winning bidder now needs to supply creative display DoubleClick, Atlas (Facebook), ad to the exchange. Bidder makes request to Advertiser Ad 4. Advertiser Ad Server Mediaplex, PointRoll, Media Mind, Server to provide ad. Flashtalking, Spongecell, Vindico
Step 5: To comply with privacy standards, Advertiser Ad Server makes request to Opt-Out provider to deliver an opt- 5. Opt-Out Ghostery, Evidon, TRUSTe out button, which is overlaid at right corner of display ad.
Advertiser
Source: Jounce Media. Note: CMS = content management system.
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Presumably, the entire exchange above happens instantaneously without any interference to the web browsing experience. While the “ad-tech stack” illustrated here includes the five key steps in all programmatic impressions, the process can be significantly more complex and include detours for media arbitrage, targeting data, and measurement tracking. It is also important to note that for some impressions, each point in the stack can be controlled by a single company, such as occurs when an ad is purchased within the sphere of Google, Facebook, or AOL.
Within this process, the agencies primarily operate in the sphere of buy-side technology, or steps 3 and 4. An agency’s role is to stay on top of technology advancements within the tech stack and, on behalf of clients, choose and contract with vendors at the bidder and advertiser ad server level, using scale to structure preferred rates. Ideally, an agency should also be involved in the planning, execution, and measurement of a programmatic exchange. We say ideally as the lines between agency and ad-tech provider are sometimes blurred, with the latter occasionally handling execution and management. In addition to steps 3 and 4, agencies are present along the stack through wholesale ownership or stakes in ad-tech firms which they can use to influence the process.
Programmatic matures. While growth rates for programmatic remain high, the business is maturing, prompting a closer examination by advertisers of how their ad dollars are being spent. Some advertisers are concerned with the lack of transparency, especially when an agency may have stakes in certain digital media companies suggesting a possible conflict of interest (i.e., are agencies buying space on their own properties even if not in the best interest of the advertiser). We believe that increased scrutiny has and will result in greater transparency over time, consolidation along the tech-stack, and a squeeze out of smaller players whose value is deemed low. We expect some pricing pressure, but given the still rapid growth rates and rising penetration of digital, programmatic should remain a driver of agency growth. We believe agencies have protected margins by cutting vendors out of the process and move capabilities and knowledge in-house.
Agency programmatic strategies diverge. The agency holding companies all tend to approach programmatic differently, with key factors including the level of transaction risk (agent or principal) and the level of centralization within the agency. Transaction risk comes from an agency programmatic arm buying inventory on a principal basis and then selling the ad back to a client (usually of the in-house media buying firm), therefore taking pricing risk, albeit for a short period of time. In some ways, this is not unlike a brokerage firm risking its own capital as it makes a market in stocks or bonds.
Among agencies, WPP’s Xaxis is notable for taking the principal approach (in addition to the pure agent role). Xaxis will generally structure its programmatic agreements based on a guaranteed effective CPM outcome to the client. Under this arrangement, WPP takes on the full risk of executing the campaign to the agreed upon eCPM outcome, and likewise it does not detail the various costs incurred of media or the tech stack components. For Xaxis, there are two key advantages: 1) executed correctly, taking principal inventory can be more lucrative than acting in a pure agent role; and 2) by purchasing in advance, Xaxis in theory is able to provide better inventory to its clients than competitors can.
The key drawback to taking principal inventory is that many clients are simply uncomfortable with the arrangement, a concern we have heard directly from CMOs.
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Many advertisers continue to prefer agencies operate as an agent, executing programmatic buys on exchanges on behalf of clients.
Ultimately, we believe which model prevails will depend on how much advertisers value the best inventory vs. how much they value transparency. Given the ubiquity of inventory on the Internet, we would have previously argued against the principal model as it would seem possible for an advertiser to acquire the inventory they want without having to purchase directly from their agency (i.e., an advertiser can always buy ad space on CNN.com if the space on MSNBC.com has already been purchased). However, as digital video emerges as a high-quality medium, with relatively high demand and scarcer supply, the advantages of Xaxis’ model may become more important.
A notable accounting impact is seen from buying media as principal rather than as an agent. Since there is pricing risk to the trading desk, the media buy must be grossed up so that the full cost is reported as an expense and the full price allocated to the client at execution is reported as revenue (the desk owns the inventory it is selling the client). This differs from traditional media buying where only the net margin on the media buy is reported as revenue to the holding company. WPP therefore reports “net sales” as well as revenues, which it argues removes any flattering impact of this difference in accounting. We note, however, that if an agency does not take transaction risk, then for media buying net sales and revenue would be equivalent (WPP also cites the difference between net sales and revenue in its data investment management division where revenue includes pass-through costs, principally for data collection).
Marketing Services In addition to creative and media, the major holding companies own agencies engaged in the broader area known as marketing services. This includes a wide range of disciplines, including CRM, PR, specialty communications, healthcare, multicultural, research, direct, branding, events, and sports marketing. We note that the holding companies can service clients in these verticals through dedicated agencies, as well as through their larger agency networks.
As marketers look for more specialized and targeted ways to deliver their messages, an advertising organization’s ability to deliver a wide variety of services helps to attract more business and boost its overall profitability, since overall sales and marketing costs fall and services can often be bundled together at higher rates, leading to improved margins. In addition, this business mix gives holding companies a more diversified revenue base, providing some downward protection in a sluggish economy and upward pressure on growth rates in a robust environment. Providing many services to one client also can help solidify the agency/advertiser relationship.
Longer-term, these agencies should benefit from advertisers shifting spend into targeted, measureable, and often cheaper forms of marketing. We note though that marketing services has not been immune to the pressures facing the broader industry, and some subsectors, such as field marketing or research have seen a notable pullback in client spending. In the past few years, holding companies have also moved to divest agencies deemed to be non-core to their strategies. For instance, OMC has sold print media firm Novus, in addition to business outsource firms Sellbytel and Marketstar. Meanwhile, Publicis announced it was divesting Publicis Health Services, a unit which has dragged on organic growth, while WPP announced
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it would sell a majority stake in Kantar. Below we review some marketing services and provide a list of key agencies servicing each subsector.
Direct Marketing: includes growth areas such as data-based and interactive marketing, as well as traditional units such as direct mail and telemarketing. Leading direct marketing firms include Omnicom’s Rapp; WPP’s Wunderman and OgilvyOne; Interpublic’s MRM//McCann (formerly MRM Worldwide); Publicis’ DigitasLBi; and Havas’ Havas Worldwide (formerly Euro RSCG 4D). Niche players include Harte-Hanks. Market Research: includes syndicated research with ongoing panels of participants, as well as ad-hoc / customized research. Syndicated involves ongoing panels of participants and typically is a more steady and profitable business. Customized research has not regained meaningful traction since the downturn as advertisers still hesitate to commission individual studies, and hence margins have remained weak in this part of the business. Market research companies pass through data collection costs to their customers as a cost of goods sold. As data collection costs are coming down due to Internet data gathering as well as outsourcing of this function to lower cost labor markets, gross revenues on market research are coming down; however, net revenues (the base from which operating costs are drawn) are largely unaffected. WPP stands out as the only ad holding company that possesses meaningful market research businesses (Kantar). Other pure-play market research firms are Nielsen, GfK, and Ipsos. Promotional Marketing: in-store marketing involves advertisers trying to reach consumers at their most vulnerable position, point of sale. The purpose is to move product, ideally at the expense of a competitor. Promotional marketing attempts to appeal directly to consumers by offering price discounts, free samples, and in- store advertising of products to heighten consumers’ awareness and purchase of a company’s products. Pressures to the retail sector, in particular from online competition, have recently led to slower organic growth for these businesses, and even prompted OMC to make some divestitures in the space. Promotional agencies include Omnicom’s Integer and independent firms such as Valassis (newspaper FSIs and shared mail). Public Relations (PR): firms specialize in the communication and management of a client's image to the public. Organic growth for Public Relations improved notably in 2018 following softer performance in 2017. At OMC, organic growth for PR was +1.8% (vs. 0.3% in 2017), and at WPP net sales growth for PR was 1.8% (vs. 0.2% in 2017). IPG does not breakout PR separately, though growth for its CMG division which includes PR firms was 3.4% in 2018, up from flat in 2017. Leading PR firms include Interpublic’s Weber Shandwick and Golin (formerly Golin/Harris); Omnicom’s Fleishman-Hillard, Porter Novelli, and Ketchum; WPP Group’s Hill & Knowlton, Burson Cohn & Wolfe, and Ogilvy Public Relations; Publicis’ MSLGROUP (formed as merger between Publicis Consultants and Manning, Selvage & Lee); and Havas’ Euro RSCG Worldwide PR (formerly Euro RSCG Magnet). Health Care Marketing: several large agency networks and holding companies employ dedicated healthcare groups. Broadly speaking, the role of these agencies to raise awareness for healthcare businesses among patients and providers. Leading agencies include Omnicom Health Group; Interpublic’s McCann Health and FCB Health; Publicis’ Publicis Healthcare Communications Group; WPP’s Ogilvy Health and VMLY&R Health; and Havas’ Havas Life Medicom.
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Multicultural Marketing. Advertising targeted to specific ethnic populations is affected by the language used and cultural interpretation. Advertising agencies have recognized the importance of multicultural marketing by operating agencies that cater to African-, Asian-, and Hispanic-Americans. Hispanic marketing, in particular, is seen as a very high-growth area given burgeoning Hispanic populations in many parts of the U.S. and a new recognition of the targetability of this consumer group by advertisers. Each of the top-tier holding companies has an agency that ranked among the top 10 multicultural agencies for at least one of the ethnic groups. Digital/Interactive Specialists. While many online disciplines have been incorporated into full-service agencies, some still operate as stand-alone entities in order to leverage expertise across a holding company or allow for a greater range of clients. By virtue of the vast landscape of digital marketing, most agencies (both full-service and stand-alone) fulfill a variety of roles. These companies generally help clients design and operate websites, manage databases, perform market research and segmentation analyses, plan the best mix of interactive vehicles to use, produce creative online advertising/social campaigns, provide interactive CRM services such as e-mail marketing, and, in some cases, buy online advertising inventory and run sponsored search. Sports and Event Marketing. Event marketing advertising expenditures have experienced good growth as advertisers seek alternative ways to break through the fragmented media landscape. However, events are often the first to be cut in difficult times, as happened in the last recession, creating greater volatility for an agency. Contributing to recent growth has been the increased popularity of sports and other entertainment events. Also, media has played a significant role in increasing the popularity of some athletes, causing marketers to get them under contract and create a brand affiliation. As the athlete becomes more successful, the hope is that the brand will benefit from the association. Many agencies have consolidated their sports marketing businesses under one umbrella. For example, Interpublic has grouped most of its sports and entertainment marketing businesses under Octagon to go along with another of its large agencies, Jack Morton. Omnicom owns a leading experiential marketing company, GMR Marketing, as well as The Marketing Arm. Likewise, WPP Group offers sports marketing services through PRISM.
Advertising and Marketing Services Company Growth Drivers
Advertising and marketing services companies have three main drivers of revenue growth. These are industry growth, net new business wins, and acquisitions. These companies report an estimate for organic growth (industry growth and net new business wins) separately, distinguishing it from total reported growth, which includes growth from acquisitions. Foreign exchange also affects total reported growth. Investors tend to focus primarily on organic growth as the key figure in a company’s revenue performance.
Industry Growth Industry growth is the starting point for ad agency growth. A healthy business climate typically leads to healthy advertising spend as we outlined in the section on ad spending in relation to GDP growth. We are currently in a healthy ad market as
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advertisers continue to rely on advertising to drive revenue growth and go after market share. We believe ad spending will increase +3% in the U.S. and 5% globally.
Net New Business (Market Share Gains) The second leg of growth is new business wins. Holding companies win or lose client accounts, taking market share from each other or from independent agencies. Consolidation of agency rosters, particularly in media, has led the largest firms to collectively realize a net gain in new business in recent years.
J.P. Morgan tracks account activity across a number of trade press publications, and has maintained a database of wins/losses over a twenty year period. We also update investors once a month on the latest account shifts and review launches in our Ad Monitor note. Net new business is generally reported in terms of gross billings. As a rule of thumb, we assume revenue equals 10% of billings for a creative account and 1-3% for a media account, though the actual number can vary significantly. The time between the announcement of an account shift and the actual start is generally 3-6 months but can be longer if the client was with the incumbent agency for an extended period of time. Upon onboarding new business, an agency will often overstaff the account in order to establish a positive relationship with the client, and therefore a large amount of wins can actually be margin dilutive. Correspondingly, when a holding company loses an account, it will quickly reallocate or layoff staff, providing a boost (albeit temporary) to margin.
Table 10: Summary Net New Business by Holding Company, 2018 2018 Gross Reported Billings Net Equivalent Holdi ng Company Wins Losses Net Revenue Publicis 4,850 (2,879) 1,970 171 Omnicom 5,411 (3,038) 2,373 122 MDC Partners 512 (237) 275 41 Havas 322 (705) (383) (26) Interpublic 2,226 (2,388) (162) (48) Dentsu 1,041 (2,826) (1,785) (84) WPP Group 2,960 (5,261) (2,301) (186) Total $17,320 ($17,334) ($13) ($9) Source: Reported billings by company, media reports, J.P. Morgan Estimates
While we accumulate data from many sources, our view into new business activity is generally more focused on North America and Europe. Even in those regions, the trade press only captures a partial view of account moves, with many going unreported (typically when a client prefers not to announce). We also do not keep a record of marketing services wins/losses. For these reasons, we believe it is difficult to calculate an exact correlation between our data and a holding company’s organic growth. Nonetheless, we do believe tracking new business to be highly useful as a directional indicator of the health of an agency; for instance, PUB, which finished net new business negative and at the bottom of our tables at the end of 2015/2016, unperformed its North America peers in 2016/2017.
Marketers can review new business based on statutory requirements (often Media accounts are structured as three year contracts), or due to dissatisfaction with the incumbent agency. Account review activity has been elevated over the past few
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years, as the rapidly shifting media landscape, combined with a more frequent turnover of CMOs has led companies to re-examine their agency relationships. For media reviews, we believe advertisers are prioritizing agencies that can negotiate the best pricing, are abreast of the latest technological trends and changes, and have a record of transparency.
Acquisitions Major M&A picked up in 2018, highlighted by IPG’s purchase of Acxiom Marketing Solutions for $2b (net of a $300m tax step-up) and AT&T's acquisition of AppNexus for $1.6b; during the year, WPP also announced it would sell a majority stake in Kantar. 2017 was a quieter year for M&A, which followed a modest resurgence in activity between 2012 and 2016, including Dentsu’s $5b acquisition of Aegis, Dentsu’s $979m investment (68.3% stake) in Merkle, Publicis’ $3.7b acquisition of Sapient, and the failed Omnicom-Publicis merger. Outside of these mega deals, the holding companies continually make many smaller acquisitions targeted to specific disciplines and geographies, notably digital and emerging markets. Based on our conversations with holding company management teams, we believe there is a little desire for large scale acquisitions (i.e. purchasing each other). More recently, domestic agencies IPG and OMC have taken to divesting some non-strategic assets, which has negatively impacted total growth.
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Figure 36: Major Mergers and Acquisitions ($, ₤, and € in millions) Trans. Transaction Value as a Multiple of: Year Target Acquirer Primary Category Value Sales EBITDA EBIT 2018 Acxiom Marketing Solutions IPG Data marketing and management $2,300.0 2.9x 11.5x 2016 Merkle Dentsu Data marketing $1,433.4 20.0x 2015 Grupo ABC Omnicom Group Advertising & marketing services $270.0 - - - 2015 Creative Counsel Group Publicis Advertising & marketing services ~R1,500 2.5x 2015 Essence WPP Group Digital Media Agency £70.0 1.0x - - 2015 Comscore (~15-20% stake) WPP Group Market Research $300.0 4.5x 20.0x - 2015 FullSix Havas Digital Agency $75.0 1.0x - - 2014 Sapient1 Publicis Digital Marketing $3,700.0 2.7x 14.1x - 2014 AppNexus (~16% stake) WPP Group Digital Technology na - - - 2014 IBOPE WPP Group Market Research $300.0 1.5x - 2014 Rentrak (17% stake) WPP Group Market Research na - - - 2013 Globant (20% stake) WPP Group Digital Marketing $80.0 1.0x - 2012 LBi Publicis Digital Marketing € 437.0 - 11.0x - 2012 Aegis Dentsu Advertising & marketing services $4,920.0 - 12.0x - 2012 AKQA WPP Group Digital Marketing $540.0 2.3x 12.8x - 2012 Doner (minority) MDC Partners Advertising & marketing services $17.5 - - - 2012 TargetCast MDC Partners Media Buying & Planning $17.5 - - - 2012 RJ Palmer MDC Partners Advertising & marketing services $25.0 - - - 2011 Vice (minority stake) WPP Group Digital Media $35.0 - - - 2011 Rosetta Publicis Digital Advertising $575.0 2.6x 12.0x - 2011 Clemenger BBDO (step up to majority) Omnicom Group Advertising & marketing services $150.0 2.0x - - 2011 Aspen Marketing Services Epsilon (Alliance Data Systems) Marketing and Data Services $345.0 1.4x 8.6x - 2011 Greystripe ValueClick Mobile ad network $70.0 1.9x 18.7x - 2011 Commarco GmbH (incl. Sholz & Friends) WPP Group Advertising & marketing services $195.0 1.0x - - 2010 iCrossing Hearst Digital Advertising $325.0 1.4x - - 2010 Innovation Interactive (incl. 360i) Dentsu Digital Marketing $200.0 2.5x - - 2009 Razorfish (Microsoft) Publicis Digital Marketing $530.0 1.4x 13.9x - 2009 Nitro Sapient Advertising $53.0 1.2x 9.4x - 2008 TNS WPP Group Marker Research £1,432.0 - 8.6x - 2008 Naked Communications Photon Group Media Strategy $318.0 8.0x 10.8x 50.0x 2007 Quigo AOL (Time Warner) Online ad network $350.0 - - - 2007 BlueLithium Yahoo! Online ad network $300.0 - - - 2007 Interactive Marketing Works TradeDoubler Search engine marketing (SEM) $112.0 - - - 2007 TACODA AOL (Time Warner) Online ad network $275.0 7.3x - - 2007 MeziMedia ValueClick Online comparison shopping $352.0 8.8x - - 2007 Bluestreak.com Aegis Online ad serving $12.5 - - - 2007 Business Interactif Publicis Groupe Digital Marketing $182.8 - - - 2007 aQuantive Microsoft Digital Marketing $6,000.0 9.7x 40.1x 54.1x 2007 24/7 Real Media WPP Group Digital Marketing $649.0 2.2x 31.0x 54.1x 2007 Alliance Data Systems Blackstone Group (Private equity) Marketing and Data Services $7,800.0 3.4x 12.4x 14.2x 2007 Clemmow Hornby Inge (49.9%) WPP Group Advertising $59.0 3.3x - - 2007 Right Media (80%) Yahoo! Online ad exchange $680.0 12.1x - - 2007 Catalina Marketing Hellman & Friedman (Private equity) Marketing Services $1,696.0 3.0x 9.9x 14.3x 2007 Hitwise Experian Digital Market Research $240.0 4.3x - - 2007 DoubleClick (Hellman & Friedman) Google Online ad serving $3,100.0 10.3x 30.0x - 2007 AgenciaClick Aegis Digital Marketing £20.0 - - - 2007 AKQA (majority stake) General Atlantic (Private equity) Digital Marketing $250.0 2.5x - - 2006 Digitas Publicis Groupe Digital Marketing $1,295.0 2.7x 16.2x - 2006 ADVO Valassis Marketing Services $1,232.5 0.8x 12.3x 22.5x 2006 Accipiter aQuantive Online ad serving $30.3 - - - 2006 Abacus (DoubleClick) Alliance Data Systems Digital Marketing $435.0 - 10.0x - 2006 Franchise Gator aQuantive Digital Marketing $21.5 2.8x - - 2006 VNU (Private equity consortium)(2) Market Research € 8,600.0 2.0x 11.9x 15.7x 2006 Medical Broadcasting Company Digitas Healthcare Interactive Advertising $30.4 1.3x - - 2005 The Communications Group (70% stake) WPP Group Advertising $70.0 1.0x - 6.0x 2005 SOPACT, Metrobus, JC Decaux Ned. (Publicis) JC Decaux Advertising € 110.0 - - - 2005 Fastclick Valueclick Digital Marketing $214.0 3.7x 27.1x 28.8x 2005 Digital Impact Acxiom Marketing Services $120.0 2.5x - - 2005 Molecular Aegis Marketing Services $31.5 - - - 2005 AZTEC Aegis Market Research £18.1 2.2x - - 2005 Zyman Group (61% stake) MDC Advertising $75.7 1.8x - - 2005 Grey Global Group WPP Group Advertising $1,310.0 0.9x 8.7x 10.3x 2004 Cooper & Hayes Omnicom Group Advertising $25.0 - - - 2004 Bounty (Havas) LDC Marketing Services £20.0 - - - 2004 Modem Media Digitas Digital Marketing $200.0 3.1x 11.0x - 2004 Consodata Acxiom Database Marketing € 30.0 0.6x - - 2004 Claritas Europe (VNU) Acxiom Database Marketing $33.5 0.4x - - 2004 SBI Razorfish aQuantive Digital Marketing $160.0 1.7x - - 2004 Advertising.com AOL Digital Marketing $435.0 1.9x - -
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Trans. Transaction Value as a Multiple of: Year Target Acquirer Primary Category Value Sales EBITDA EBIT 2003 Isis Research Aegis Market Research (Health Care) £23.8 - - - 2003 Cordiant WPP Group Advertising £198.0 0.4x 5.4x - 2003 FD International Advent International Public Relations £26.0 0.8x - - 2003 Scholz & Friends (77.3% stake) Electra European Fund LP and Scholz mgmt Advertising £15.8 0.4x - - 2003 Agency.com (Seneca) Omnicom Group Internet Advertising $196.8 - - - 2003 NFO Taylor Nelson Sofres Market Research $425.0 0.9x - - 2003 NCH Marketing Services Valassis Marketing Services $49.4 0.7x 4.5x 6.4x 2003 Chime Communications (49% of HHCL) WPP Group Public Relations $19.3 - - - 2002 Organic (Seneca) Omnicom Group Internet Advertising $106.2 - - - 2002 BCom3 Group Inc Publicis Groupe Advertising $3,133.7 1.6x 12.2x 28.1x 2002 Maxxcom MDC Corp Advertising $16.2 0.0x 0.7x 1.4x 2002 @plan.inc Nielsen NetRatings Online Market Research $18.5 - - - 2002 Scottish Radio (Score Outdoor) Clear Channel UK Ltd Outdoor advertising (billboards) $83.8 3.4x - 94.8x 2002 UPSHOT Equity Marketing Inc Promotion and Event Marketing $10.3 - - - 2002 Art Marketing Syndykat (82.9%) Agora SA Advertising $45.4 - - - 2002 PR Force NV* Incepta Group PLC Public Relations $19.7 4.4x - - 2002 Flack Outdoor Advertising Inc NextMedia Group Inc Outdoor advertising $24.9 - - - 2002 DoubleClick Japan Inc (25.6%) Trans Cosmos Inc Internet Advertising $16.3 0.6x - - 2001 Tempus WPP Group Media Buying $674.8 2.8x 20.0x 25.7x 2001 True North Communications Interpublic Group Advertising $2,250.1 1.4x 8.5x 11.0x 2001 55% of Media Planning Group Havas Media Buying $470.5 4.6x - - 2001 NPD (custom marketing division) Ipsos Marketing Research $120.0 1.7x - 12.0x 2000 ACNielsen VNU Marketing Research $2,339.5 1.5x 14.5x 15.1x 2000 Deutsch Interpublic Group Advertising $250.0 1.7x - - 2000 Leagus Delaney Envoy Advertising $86.0 1.9x 19.3x - 2000 Lighthouse Global Network Cordiant Marketing Services $542.0 3.4x 14.6x - 2000 Saatchi & Saatchi Publicis Groupe Advertising $1,900.0 2.5x 18.7x - 2000 Young & Rubicam WPP Group Advertising $4,714.0 2.4x 13.7x 18.1x 2000 Caribiner (Communications Group) Interpublic Group Specialized Communications $90.0 0.4x - - 2000 Competitive Media Reporting (VNU) Taylor Nelson Sofres Marketing Research $88.0 1.6x - 11.7x 2000 Snyder Communications Havas Advertising & Direct Marketing $2,237.5 3.2x 17.1x 21.4x 2000 Fallon McElligott Publicis Advertising $120.0 1.5x - - 2000 Frankel Publicis Direct Marketing $170.0 1.8x - - 1999 M/A/R/C Inc. Omnicom Group Direct Marketing $122.4 1.3x 12.8x 28.0x 1999 Rainey Kelly Campbell Roalfe Young & Rubicam Advertising $40.5 - - - 1999 Mullen Advertising (75%) Interpublic Group Advertising $45.0 1.6x - - 1999 KnowledgeBase Marketing Young & Rubicam Direct Marketing $175.0 5.2x 23.4x - 1998 Abbott Mead Vickers (72.3%) Omnicom Group Advertising $447.1 3.0x 14.7x 18.1x 1998 CKS Group USWeb Corp. Interactive Ad./Marketing $312.6 2.0x 13.9x 16.8x 1998 International Public Relations Interpublic Group Public Relations $226.5 1.0x - - 1998 Jack Morton Interpublic Group Specialized Communications $100.0 1.4x - - 1998 Arnold Communications Snyder Communications Integrated Marketing $120.0 1.2x - 9.2x 1998 Hill, Holliday Interpublic Group Advertising $100.0 1.4x - - 1998 Carmichael Lynch Interpublic Group Advertising $40.0 1.3x - - 1998 GGT Omnicom Group Advertising $300.0 1.0x - 10.0x 1997 Bozell, Jacobs, Kenyon & Eckhardt True North Advertising $440.0 0.9x - 10.0x 1997 SiteSpecific CKS Group Interactive Ad./Marketing $6.5 3.6x - - 1997 Fleishman Hillard Omnicom Group Public Relations $85.0 0.8x - - 1996 64% of Modem Media True North Interactive Ad./Marketing $33.0 3.4x 13.6x 15.5x 1996 DiMark Harte-Hanks Direct Marketing $44.5 0.6x - - 1996 Ketchum Communications Omnicom Group Public Relations $65.0 0.5x - - 1995 DIMAC Heritage Media Direct Marketing $251.8 2.2x - - 1995 Ross Roy Communications Omnicom Group Direct Marketing $57.9 0.9x 5.3x 5.9x 1994 Western International Media Interpublic Group Media Buying $50.0 0.6x - - 1994 Ammirati & Puris Interpublic Group Advertising $55.0 0.8x - - 1993 TBWA Advertising Omnicom Group Advertising $65.0 0.7x - - 1991 Scali McCabe Sloves Interpublic Group Advertising $55.5 0.8x - - 1989 Ogilvy Group WPP Group Advertising $793.0 0.9x 9.1x - 1987 JWT Group WPP Group Advertising $555.3 0.9x 17.1x - 1986 Ted Bates Worldwide Saatchi & Saatchi Advertising $391.0 1.2x - - 1986 Doyle Dane Bernbach/Needham Harper/BBDO Omnicom Group Advertising $480.2 0.7x - - 1986 Backer & Spielvogel Saatchi & Saatchi Advertising $47.2 0.8x - - 1986 Dancer-Fitzgerald-Sample Saatchi & Saatchi Advertising $70.8 0.6x - - Mean 2.2x 14.6x 139.4x Median 1.6x 12.8x 15.5x (1) Sapient EBITDA multiple includes synergies; (2) Consortium includes AlpInvest Partners, The Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co., and Thomas H. Lee Partners. Source: Various media; J.P. Morgan.
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Industry Trends
As an industry, ad agencies grew in a healthy range of 3%-4% from 2012 to 2016, and then slowed notably to 1%-2% over the prior two years despite a relatively steady global economy. There is no one factor to perfectly explain the more disruptive environment for agencies, rather we view it as a combination of headwinds, including overcapacity, in-housing, a shift to project-based assignments, a reduction in the overall scope of work (driven by a greater cost focus from clients), and at the margin new competition from non-traditional players such as consultants. Below we provide an overview of these challenges, along with how the major holding companies are adjusting their strategies as a result.
Overcapacity Remains a Challenge in Creative Despite all the pressures in the advertising ecosystem today, the industry remains oversupplied with creative agencies. We note in media planning/buying this is less of a factor, as scale provides real advantages in negotiating power and data which favors the largest holding companies. There are fewer barriers to entry on the creative side though, which is highlighted by frequent trade press articles with the typical headline of "former executive of agency X leaves to start new agency Y." That disruption exists only seems to exacerbate this trend, as newer agencies' pitch to clients often boasts a strategy or structure unburdened by legacy organizations.
Another factor driving industry overcapacity is the rise of specialist creative agencies, which have tried to capitalize on marketers shifting spend to areas such as mobile, social, content creation and production. This has also allowed consultants such as Deloitte or Accenture to gradually enter the creative space, usually through the acquisition of specialists units.
The result of oversupply is that marketers are in a position to be more demanding of their agencies in terms of both service and price. Overcapacity also allows advertisers to more easily shift away from agency of record models and assign work on a project basis. In the long-run, we think this dynamic is likely to be unsustainable, and would expect to see some consolidation, either from holding companies combining brands (e.g. VML + Y&R; Wunderman + JWT) or from large brand advertisers simplifying their rosters with fewer agencies.
Marketers Have Brought Functions In-House to Improve Efficiency and Reduce Costs In October, the Association of National Advertisers (ANA) published the results of a member survey on the topic of in-house agencies. The results broadly indicated a move to bring certain marketing functions under the control of advertisers. Notably, 78% of respondents claimed to employ an in-house agency, up from 58% in 2013 and 42% in 2008; of this cohort, 90% stated that the overall workload of their in- house agencies had increased in the prior year. The shift is more pronounced on the creative side, with 42% of respondents saying they've moved some creative services away from an external agency, as opposed to just 17% for media; overall, 76% of members answered that some creative is handled in-house, vs. 36% for media. More anecdotally, we’ve seen a number of recent examples in the trade press of clients moving work in-house including Revlon, Lowe’s, and Sprint in creative and GSK, P&G, and Vodafone in media.
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Key reasons usually cited by advertisers to handle work in-house are lower costs, greater control, faster speed to market, and superior knowledge of the product or service. 75% of marketers in the ANA survey stated that content marketing is done in-house, and we've observed major brands such as P&G or Hershey claiming to have saved on production costs by making use of their own studios. Over the past few years, the number of media channels available to advertisers has increased substantially, requiring a steady of stream of content tailored for specific platforms. For marketers, especially those with substantial resources, there is logic to handling these functions in-house to optimize for speed and cost.
At the same time, many of the tasks moving or already in-house are those that require 24/7 service, and therefore clients can justify hiring their own internal resources. This includes areas such as social media monitoring and website maintenance. In prior versions of this report, we’ve highlighted our view that the shift to digital media was an overall positive for agencies, as it significantly widened the scope of available services they could sell to marketers. While we continue to believe this is the case, it is likely that many of the functions below, which a few years ago may have been handled by a creative or media agency of record, can now be run by marketers, usually with the help of outside ad-tech and/or consultants
Figure 37: Snapshot of advertising agency services in digital media
Source: JPM research
It’s important to note though that agencies continue to play a key role in the creative process, and the ANA survey showed that 90% of respondents still utilize an outside partner. Ad agencies, in our view, are a superior destination for the best creative talent, and can therefore help brands more effectively shape their overall message and consumer experience. They also serve as an important check against in-house content studios; for instance, Intel's global creative director recently noted of the company's external agencies, “It was good to have external partners so I didn’t have my blinders on to say ‘everything we’re doing is great’” (link).
In-housing is less common on the media side, and here we think the holding company advantages - a greater understanding of client needs across different
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channels, scale in data and purchasing, better execution - are more apparent. Regarding the last point, our own checks with industry contacts continue to confirm what agencies say publicly, that brands often try to pull a portion of programmatic in-house, only to see it fail, and return to agencies with greater appreciation for their role. A common problem that comes up is that software is not set up correctly, which ends up costing advertisers money. Previously an agency would have happily taken this cost for a client; advertisers are now stuck with losses. We also believe that advertisers have significant staffing challenges as top talent prefers to work on programmatic across an array of platforms and brands, which an agency can offer.
While some marketers with expertise in data and analytics inherent in their core businesses (e.g. Netflix, Progressive) can handle all programmatic in-house, we believe these remain the exception. More often advertisers staff up in what IPG’s CEO has called "the mechanical part” of programmatic (Q3’18 earnings call); in our view this akin to companies employing an in-house counsel, but still relying for the most part on an external law firm.
Clients Reducing Scope of Work in Traditional Areas Pricing pressure from clients, driven by their procurement arms, is a long-term trend in the agency business. But in our conversations with both marketers and agencies, we've found pricing to be no more a factor now than in past years, and, therefore, don’t attribute the slowdown in organic growth to rate. Rather, we believe marketers are more closely examining their overall spend or allocation of spend. This is most apparent among global FMCG companies which are dealing with the combination of slowing top-line growth, upstart and digitally native competitors, and sometimes activist investors pushing for bottom line improvement. These clients have responded by shifting spend away from traditional brand investment, producing more digital content with in-house studios, and relying more on trade or promotional activity to drive sales
For agencies, the net result is an overall reduction in the scope of work handled, in particular for traditional creative. Mark Read, WPP's new CEO highlighted this on the company’s Q2’18 earnings call when he stated that “Clients say I'm doing something for 10. How can I do it for 6 because… I'm going to spend 20% less on TV advertising, and I'm going to do a third fewer ads. So therefore why wouldn't I spend a third less money with you?”
As noted earlier in this report, organic growth among holding companies has diverged significantly over the past two years, which we believe partly reflects varying levels of exposure to the above dynamic. As advertisers re-evaluate how they spend their marketing dollars and shift spend to emerging channels, this is creating opportunities for agencies to expand the scope of their work provided they have the right resources in place. The pace of change is fast though, and to again quote WPP's CEO, the challenge for holding companies is that the “bits that are declining are bigger than the bits that are growing.”
Agency of Record Model Continues to Shift to Project Work Historically, clients utilized an agency of record model, choosing one shop for a specified period of time to plan and execute its creative strategy. For holding companies, the AOR model provides a level of stability and guaranteed work, and is also optimal for staffing and resource efficiency.
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Increasingly though, clients are shunning the AOR approach and assigning work on a project basis. We think this largely reflects the fragmenting media landscape: with a proliferation of channels for advertisers to place media, many are opting to work with multiple specialist and generalist agencies. Exacerbating this trend is industry overcapacity, as well as some amount in-housing, particularly at marketers that are handling creative strategy and branding internally.
We note that it is not uncommon for companies to still choose an AOR, while also continuing to work with other agencies on select campaigns. The result of this overall shift though for holding companies has been more volatility in organic growth given the temporary nature of projects. For instance, IPG's slower organic growth in 2017 was partly attributed by management to a slowdown in project work at its PR and digital specialists groups R/GA and Huge; a pickup in this work also supported an acceleration in growth in 2018.
The Consultants Are Already Here, But the Threat to Creative Agencies is Overdone A common investor concern we hear, and one frequently asked on earnings calls to agency management teams, is whether agencies are seeing increased competition from consulting firms. As the lines between agency work, marketing services, and digital transformation blur, the fear is that consultants will use their relationships with client c-suites to upsell into areas traditionally handled by holding companies, namely creative and media. The case for consultants entering this space is that brands today need to build direct relationships with consumers, which requires a new set of tools including data, analytics, and customer experience. Consultants have expertise in these areas and layering on creative to the offering would be attractive for them. Supporting this viewpoint, we've seen firms like Accenture and Deloitte acquire creative agencies, including Karmara and Heat, respectively.
In actuality, though, the presence of consultants has been more limited than the trade press makes it out to be. Besides the acquisitions above, we've seen little other M&A in the space, and in our new business tables, we rarely see consulting firm owned agencies competing with the major holding companies. While we may see consultants continue to bolt-on a creative agency or two, we believe scaling a creative offering is significantly more difficult, especially from a cultural standpoint. In April 2019, Accenture acquired Droga5, a niche creative ad agency sparking the fear once again of whether the consultants are further encroaching into the ad agency space. We view this move as not material and potentially a modest positive that shows the value of creative, though we also recognize how it may be concerning as the overlap between the two businesses continues to grow. Furthermore, Droga5 is a rather small agency at roughly ~$200m in revenues.
This is not to say that competition between agencies and consulting firms does not exist. It does, but is more common in areas where agency and consultant work overlaps, like marketing services disciplines such as CRM, direct marketing, or business transformation. The holding companies themselves have highlighted the opportunity to take increasing shares of budgets which traditionally would have fallen into consulting or technological services. IPG for instance has developed a dedicated consulting arm at its digital specialist agency R/GA, while OMC recently purchased Credera, a full-service management and IT consulting firm.
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Figure 38: Digital is driving a three-way industry convergence, offering a >$1 trillion industry
Source: J.P. Morgan research, Publicis.
Holding Company Strategies We do not believe the agency model is broken and continue to see these businesses as very much needed in the advertiser/media equation, albeit in an evolving role. We further believe that holding companies can take advantage of the disruptive environment described above by moving to a client centric approach that allows marketers to source resources from a single point. As we review below, the agencies in our coverage are at various stages of achieving this, which we think is partially driving the disparity in organic growth performance. At the same time holding companies are undergoing reorganization, we've also seen continued divestitures of non-core or underperforming businesses, as well as material acquisitions to drive revenue synergies. Below, we take a look at the major holding companies and their different approaches:
IPG: Open Architecture, Embedding Digital Expertise at the Agency Level, AMS Acquisition
In the mid-2000s, following a period of negative organic growth and margins, IPG moved to streamline its operations. Since then the company has maintained a laser focus on driving long-term growth and improving profitability, which has paid off in significant outperformance over its peers. IPG today is unburdened by underperforming marketing services businesses and its divestitures are mostly limited to smaller creative agencies. As a result of past issues, the company also moved earlier to improve transparency at its media agencies, putting it in a relatively better position with clients post ANA's report on media buying practices in mid- 2016.
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From a structural perspective, IPG has organized its services around an approach known as “open architecture.” The underlying principle is to provide clients access to talent from various disciplines (creative, media, digital, experiential, etc.) across the holding company organization. For clients, open architecture means getting the best of IPG without having to worry about in which silos the resources are located. In general, Interpublic’s principle is not to create specialized teams or agencies to service specific clients, though it will do this for large accounts where it is requested. It also believes the integrated offering is a differentiator versus potential entrants into marketing services (i.e. consultants), as it is more difficult to compete with holding companies across an array of services. From a human resources perspective, open architecture allows IPG to maintain separate agency networks and cultures and still meet client needs. It also allows employees to work on a variety of accounts and not have their careers tethered to specific clients.
Outside of open architecture, IPG has differentiated itself against peers with a build (or rent) vs. buy approach when it comes to technology. The company also pushed individual agency units to develop native digital, data, and analytical expertise, rather than developing specialist agencies for these functions. This is in contrast to peers such as WPP, which is now in the process of combining traditional and digital units (e.g. JWT + Wunderman).
In 2018, IPG broke somewhat with its prior strategy when it acquired Acxiom Marketing Solutions, formerly part of Live Ramp (RAMP, not covered). For background, IPG closed the acquisition on 10/1/18. The purchase price (all cash) was $2.3b, or $2.0b net of a $300m tax step-up, implying an 11.5x multiple on estimated FY18 EBITDA; this compares to Dentsu's acquisition of Merkle in 2016 at an estimated 20x multiple. Prior to its sale, AMS was organized into three operating segments: 1) Data Management, where it designs, builds, and analyzes databases for clients, essentially managing first party data on behalf of large companies; 2) Audience Creation, which includes InfoBase, a database on over 2.5 billion consumers segmented on 1,500 elements, to which clients can then overlay their primary data; and 3) Data Analytics, which provides advertising campaign measurement services.
We view positively IPG’s acquisition of AMS and believe it will create differentiation across media buying/planning and other marketing services. In our view the acquisition was not defensive or indicative of some kind of weakness at IPG’s media operation. On the contrary, we think the holding company’s wins/retentions over the past 18 months with Amazon, Spotify, and American Express highlight a relative edge at winning business with clients that are sophisticated in data and addressable advertising. Looking ahead, we see revenue synergies in three primary buckets:
Enhanced media buying and planning. We think the near-term priority for IPG is to use Acxiom data and expertise to enhance its own media offerings, including its AMP data platform, essentially driving a higher ROI for clients. Outside of media, we think IPG sees potential to enhance its services at Reprise, a digital specialist agency focused on search, mobile, and social. Cross selling opportunity. In the medium-term, we see potential revenue synergies in IPG and AMS cross selling each other's services. IPG has stated they have turned business away given it previously lacked the core competency of managing primary data on behalf of clients. On the flip side, AMS has long
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established relationships with large brand marketers, providing a foothold for IPG to then upsell its marketing services. AMS data and expertise can be used across a range of IPG businesses. In the long-term, we think IPG will look to utilize Acxiom's capabilities across a range of businesses, including its creative networks, PR, digital specialists such as R/GA, and CRM. We think IPG’s open architecture approach positions it to execute well on this long-term goal.
OMC: Client Matrix Organization and Practice Areas
Similar to IPG, Omnicom is organized around a client centric approach. Specifically, the company's filings state that its organizing principle "is that our clients’ specific marketing requirements are the central focus of how we structure our service offerings and allocate our resources.” OMC puts this philosophy into action through what it calls its client matrix organization. Essentially, this means that while the holding company maintains separates agencies and brands, it offers marketers resources that cut across these structures by forming client networks tailored to meet specific needs. Aside from giving advertisers what they want, the collaborative approach allows OMC to identify client issues more quickly and adjust its strategy as necessary. Omnicom began this reorganization of its portfolio over three years ago, initially focusing on its top 25 clients, before targeting a wider group.
Around the same time, OMC started forming practice areas (agencies operating in similar disciplines) to help clients better leverage resources across the holding company. This process is now largely complete and includes practice areas for healthcare, precision marketing, experiential, brand consulting, and specialty marketing. Importantly, this strategy allows individual agencies to maintain their brand and cultures, which is crucial in our view to maintaining a strong creative offering. Omnicom also makes available to its agencies Analects and Omni, which are internal platforms for data and analytics and precision marketing, respectively.
Separately, OMC has, for the past two years, been in the process of divesting businesses that are no longer core to its long-term strategy. Most notably this includes Novus, a print media operation, and outsourcing firms Sellbytel and Marketstar. Omnicom has also divested a number of businesses operating under its CRM Execution & Support segment.
WPP: “Horizontality”
“Horizontality” has long been one of WPP’s strategic aims. The creation of 'GroupM' in 2003 houses its media buying assets (Maxus, MediaCom, Mindshare etc.) which was originally separate from its creative agencies. Since 2015, the company moved ‘horizontality’ to its top priority and since we have seen two horizontals built over time: 1) the company coordinates activities across different geographies with over a third of new assignments in 2015 produced by collaboration of at least 2 of WPP's companies and 2) a regional level management appointment to ensure country specific performance and a focus on local business wins. The client specific strategies for 45 of WPP's largest clients’ accounts for over one third of group revenues with the aim of ensuring that it is able to offer its full breadth of services seamlessly.
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Figure 39: WPP's organisational 'horizontality' matrix
Source: Company data.
WPP also launched its [m]platform to further drive data exchange between agencies. Launched globally by GroupM in November 2016, the [m]platform represents an extension of the horizontality theme into the data itself. Through the integration of information across all channels, advertisers can access all digital media assets under one platform. The unification of all of WPP’s cross-platform data such as display, mobile, video, offline CRM, apps and programmatic provides media planners with detailed consumer data such as demographic trends, technology usage, behavioral insights and purchase history. We see the value-add from the [m] platform for advertisers in the access to a wide array of data sources that enable effective communication and customer targeting which can further drive incentive to increase media buying.
Publicis: “Power of One” and Publicis.Sapient
The introduction of the “Power of One” in December 2015 marked the initial transformation of Publicis’ historical structure through breaking agency silos to drive a more client centric organization. The new structure of the business comprises 4 solution hubs (Communications, Media, Sapient and Healthcare) and integrates several services. Within the recent formation of Publicis.Sapient, the company consolidated its digital offerings (Razorfish, SapientNitro, DigitasLBi and Sapient Consulting) into one operating division to leverage its diverse offerings and drive further cross selling (detailed report here).
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Figure 40: Publicis’ new operating structure
Publicis.Sapient Publicis Communications Razorfish, DigitasLBi, SapientNitro, Publicis Worldwide, LeoBurnett, Sapient Consulting Saatchi & Saatchi, BBH, Prodigious
Publicis Health Publicis Media DigitasHealth LifeBrands, Publicis Starcom Mediavest Group, LifeBrands, Saatchi & Saatchi Wellness, ZenithOptimedia, Vivaki, Performics Publicis Health Media, Touchpoint Solutions
Publicis ONE
Re:Sources
Source: Company, J.P. Morgan research.
Dentsu: “One P&L” and “People-Based-Marketing” Dentsu Aegis Network (DAN) established a unique ‘One P&L’ operating model under which the various global regions work in concert, and for many years has continued to outpace its rivals in providing services that make the most of the company’s global resources and infrastructure. The ‘One P&L’ system remains the bedrock of Dentsu’s strategy, but rivals are adopting a similar strategy, and we think its competitive advantage is now weakening. Digital strategy looks to be another of DAN’s strengths, and this is accelerating thanks to the 2016 acquisition of the marketing company Merkle. Merkle launched the MerkleONE (M1) data marketing platform in 2017, and this became the industry’s first media planning and ad impact measuring platform specialized in personal information (using anonymized IDs). According to Merkle, M1 can on average improve the return on ad spend (RoAS) by just over 20% and reduce wasteful targeting (caused by factors like fraud) by just over 25%. Merkle has an international network of more than 50 offices, started to globally roll out the M1 platform in earnest from 2018, and has executed more than 10 M&As since 2017. Dentsu targets a 100% weighting for digital-related business by 2020, and M1 rollout looks likely to be the key to whether this target is attained (management is not targeting a digital media usage rate of 100%, but wants all advertising including TV commercials to become data-driven).
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Compensation Structure
The Commission-Based System Gave Way to Fixed-Fee Rates The advertising industry today has largely moved away from commission-based compensation and toward fee-based pay. Traditionally, advertising organizations were paid at a set percentage of an advertising budget for the creative work on an account. The percentage was originally around 15% back in the early 1980s, but it has been declining as the price of media has escalated, and today it averages closer to 10-12%. The issues with commission-based compensation include the following:
Commissions create the incentive to recommend expensive media to increase agency revenues. Commissions did not appropriately align the work with the fee paid (i.e., an agency could develop a campaign, and if the client decided not to air it, the agency in theory would not be paid). The agency’s pay was not aligned with the success of the campaign.
Today, nearly all advertising clients have a fixed-fee relationship, but a client’s scale of media spend will still correlate to agency revenue given the greater scope of work.
Fixed-Fee Structure Reduces Media Spend Volatility Fee-based revenues tend to be figured on a “cost-plus” basis and, thus, should be less cyclical than compensation schemes tied directly to advertising’s ebbs and flows, resulting in more predictable agency performance. In this model, a client agrees to pay total costs plus a profit margin and requires agencies to be held more accountable for their spending estimates and actual outlays. Cost plus fee-based revenues tend to be recognized earlier in the work process, when the service is rendered, whereas commission-based revenues are recognized when the advertising appears on a specific medium, which is after the agency makes sizable expenditures. As long as an advertising company’s management is diligent regarding receivables, fee-based revenues should be collected earlier than commissions, translating into enhanced cash flow dynamics. The fixed-fee basis also enables the agency to plan its own budgets better, hence giving the holding company a better grasp of its businesses’ performance. This system may limit the agency’s upside, however, in an inflationary environment, when a commission system might otherwise produce a greater windfall. We note that the fixed-fee method seems to favor the agencies in light of the trend of media fragmentation. As dollars move from traditional, expensive media to multiple, lower cost media, the agencies should garner a larger portion of the overall marketing budget. However, pricing pressure is ongoing as it is easy to push back on margin in this fee structure, which has remained a headwind for agency revenues.
Incentive-Based Compensation Often Talked About but Not Much Used Incentive-based compensation is a component of a fee-based system. This method has emerged as clients seek more accountability for how advertising spending improves performance, which is measured by both objective and subjective metrics, including sales, market share, and the quality of creative work. Many agencies, however, aren’t willing to take on the risk of this system, particularly given the difficulty evaluating the “success” of a campaign. Furthermore, difficulties in aligning the right criteria on which to base incentive compensation have also somewhat limited its use. These structures are more commonplace at media agencies, where ROI, in particular for digital campaigns, is more measurable.
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Financial Outlook
2019 marks the tenth year of the advertising recovery, which has seen healthy organic revenue growth for the holding companies since 2010 in the low single digits, driven by the US and UK and emerging market strength. Growth notably accelerated for the industry (more the US-based agencies) in 2014 and 2015, before since 2016. Outlooks provided by the holding companies point to a modest deceleration in aggregate, with continued uneven performance. IPG and OMC have both guided to 2-3% organic growth, while WPP’s guidance is for -1.5% to -2.0%. PUB is guiding to higher organic growth in 2019 (2018 was 0.1% and 0.8% ex- PHS), and has maintained its outlook for 4% growth in 2020. Dentsu guided an organic growth of over 3% for its overseas business. Based on current exchange rates, we expect a headwind for domestic agencies in 2018, while we calculate a +1.4% tailwind for Publicis and a -0.6% headwind for WPP. On margins, IPG has guided 40-50bps of improvement (excluding a one-time charge to right-size its costs structure following end of 2018 account losses), while OMC is looking for flattish y/y. WPP is expecting the margin to be down around 100bps (ex IFRS 16) and Publicis is targeting operating margin expansion of +30bps to +50bps in 2019/2020. In terms of buybacks we expect OMC to roughly keep pace with 2018, repurchasing $600m; we model no repurchases for IPG this year, as it prioritizes cash flow to pay down debt associated with the AMS acquisition. We expect Publicis to execute well on its €400m share buyback program but see limited scope for share buybacks for WPP. We model IPG EBITA growth of 11.1% driven by an incremental three quarters of AMS, while deal associated interest expense and a higher forecast tax rate (also likely conservative) lead to more modest EPS growth of 0.6%. For OMC, we model EBITA growth of 0.6%, with negative revenue growth (driven by FX and divestitures) offset by ~25bps of margin improvement; our EPS estimate for the year is up 2.2%, boosted by ongoing share repurchases. For WPP we assume 2019 organic growth of -2.1% and now assume a 100 basis point reduction in underlying operating margin. For Publicis, we see 0.9% organic revenue growth and a 15.0% operating margin this year. For Dentsu, we expect an organic growth of +1.7% in its overseas business which is below guidance. We reflect concerns surrounding its APAC business and forecast operating margin to remain almost flat year-over-year at 13%.
Below, we take a look at the various components that drive revenue and EPS performance.
Revenues As discussed in more detail in the preceding “Growth Drivers” section, three main variables affect revenue growth: industry growth, market share gains, and acquisitions/divestitures. A fourth element to reported performance is foreign exchange movements, which can swing revenue growth and sometime affect profitability.
As we discussed in the “Macro View” section, we are expecting healthy core ad spending levels this year, albeit modestly lower given lower forecast GDP and the absence of cyclical events. We project the global ad spend will grow 5% in 2019 with 3% growth in the US.
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Market Share Gains As discussed earlier in the report, account movement does have an influence on top- line trends. At the end of 2018, Publicis sat at the top of our new business tables, helped by account wins with GSK, FCA, Samsung, Western Union, Mercedes, and Campbell's. The holding company is likely to see a boost to organic revenue as a result, though management has noted continued softness a traditional creative networks will offset, mainly during the first half of the year. OMC sat at the number two position in our tables, helped by notable wins with Ford, US Army, and WarnerMedia which expect to support an improvement in domestic organic in 2019. Omnicom may see a slower start to the year however, as the company cycles through losses with GSK and a reduction in media work at P&G North America. IPG ended 2018 net new business negative, and will have to cycle headwinds starting in Q2 from the loss of FCA media and the long-held US Army account. Finally, WPP will have a significant headwind from account losses, most significantly Ford, GSK, American Express, and HSBC. Dentsu’s net new win was roughly one-third of that of 2017, which should lead to weak organic growth in 2019. However, the company expects momentum to recover this year with new business wins such as additional work with P&G North America and LVMH, and expects around 80% of pitches to be offensive this year.
Acquisitions On Oct 1, IPG completed the purchase of Acxiom Marketing Solutions for $2.3b. With three incremental quarters of contribution in 2019, we model a +6.2% impact from acquisitions to total revenue growth (AMS is partly offset by a modest amount of smaller agency divestitures). At OMC, we mode a -2.5% disposition impact driven by the sale of non-core businesses, including outsourcing firms MarketStar and Sellbytel, in addition to a number of smaller CRM agencies. WPP made 15 acquisitions in 2018, largely small in scale and down 50% on 2017. Key disposals include Globant and AppNexus. Publicis announced early this year that it is exploring the acquisition of acquisition of Epsilon, the marketing services company owned by Alliance Data Systems Corp. Dentsu has consistently made acquisitions with a particular focus in the overseas digital area, and in fact made over 15 acquisitions in 2018. Surprisingly, the company also made two major investments in Japanese online advertising companies (Septeni Holdings and Voyage Group), in an effort to close its gap with competitors.
Operating Margins Approximately 60% of costs at the typical advertising and marketing services company are salaries; this high variable cost component helps protect earnings during downturns as companies manage their staffing levels and reduce incentive compensation to meet business demand. Management teams have also been hard at work on fixed costs such as back office operations and rent expense, and while many of the bigger strides were made in the downturn, efficiencies are still being gained to drive stronger margin expansion.
Historically, the agencies have not been big margin stories given their more variable cost structure vs. media owners. The ad market recovery, however, provided the opportunity to drive greater operating leverage on a more efficient cost base out of the downturn. At this point in the cycle, we would expect less impact from margin expansion, and only IPG and PUB have definitively stated they expect margin growth in 2019. IPG is guiding to 40-50bps of expansion in 2019 following a 63bps increase last year, and we expect much of this to be driven by AMS which carries a higher margin. OMC meanwhile is looking for flattish EBITA margins following
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5bps of improvement in 2018. WPP is expecting the margin to be down around 100bps excluding the impact of IFRS 16 (while the application of IFRS 16 will increase the operating profit margin by c50 bps). PUB is targeting operating margin expansion of +30bps to +50bps in 2019/2020. We believe the company will continue to benefit from its current restructuring efforts and further synergies (Sapient synergies, benefits from the ERP switchover and shared services between agencies). Dentsu is expecting operating margin to be up only 10bp to 13.0% in its overseas business but plans to improve it to 15% in 2021.
Longer term, we believe that margins will modestly increase in a healthy ad market given higher incremental margins on growth. We also expect that as the integrated agencies assume a greater proportion of marketers’ budgets, margins should naturally improve as the companies can leverage more marketing dollars across their expertise on that account. In addition, the longer an agency maintains an account, the more profitable that relationship usually becomes as it moves beyond the initial costs and is able to better manage the account (e.g., taking advantage of higher utilization rates). We believe some of the best individual agencies have in the past achieved targets as high as 20-25%, implying that there is still quite a bit of room for margin expansion at the advertising and marketing services companies. Lastly, we believe the digital areas often have higher levels of sustained profitability once past their original ramp-up on an account, so as these businesses assume a larger portion of the agency revenues, we should see a benefit to profitability.
Interest Expense We expect interest expense to increase at IPG due to the additional debt associated with the Acxiom transaction. We model flat interest expense for OMC, as the company will benefit from a high-coupon debt maturity in mid-2019. For WPP, we expect an increase in total financing expenses to -£270m (versus £180m in 2018) while c.£100m is related to the adoption of IFRS 16. In regards to Publicis we expect a step up in interest costs from €84m to €107m for the same reason.
Tax Rates For both IPG and OMC, we model a 27.0% effective rate, slightly higher than in 2018. The higher tax rate for both IPG and OMC will be somewhat of a headwind for EPS growth, although we believe these rates are likely conservative. WPP saw a headline tax rate of 22.5% in 2018 similar to the previous year. We expect the tax rate to marginally increase to 22.7%. We forecast PUB’s tax rate to remain stable at 26.0%. We expect the tax rate for Dentsu will increase to 35.0% (normal level) in 2018 from 24.4% in 2017. We expect the tax rate for Dentsu to slightly decrease to 33.7% in 2019 from 34.5% in 2018.
Share Buybacks and Dividends Given minimal capital expenditures, we expect all of these companies to produce healthy free cash flow this year. We also look for continued returns of cash to shareholders: we look for OMC to repurchase $600m in addition to dividend yield of ~3.5%. However, we expect no buybacks for IPG as the company prioritizes debt pay down, but still expect a very healthy 4.4% dividend. While we expect no share purchases for WPP in 2019, we see a dividend payout ratio of 63% in 2019. We expect PUB to have a payout ratio of 47% in 2019. For Dentsu, we expect it to achieve a payout ratio of 27.4% in 2019, and a dividend yield of 2.0%.
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Valuation
Advertising and marketing services companies are valued on both a P/E basis and other metrics such as enterprise value to EBITDA (EV/EBITDA), especially when comparing U.S. companies to European companies, given differences in items such as interest expense and convertible bonds and related tax effects. In this section, we provide an overview of historical trading patterns; we provide specific valuation and stock recommendations in the company-specific sections that follow.
Figure 41: Ten-Year Historical Share Price Performance, Indexed 450 400 350 300 250 200 150 100 50 0 4/1/2009 4/1/2010 4/1/2011 4/1/2012 4/1/2013 4/1/2014 4/1/2015 4/1/2016 4/1/2017 4/1/2018
SPX Big 4
Source: Bloomberg; J.P. Morgan. Note: Big 4 is OMC, IPG, PUB, and WPP.
Omnicom Historically, OMC shares traded at a ~20% premium to the S&P prior to this past recession. Beginning mid-2007, this historical premium quickly became a discount (the first time since early 2003) that has fluctuated in the recovery, at times returning to premium valuations. Shares are currently trading at a -26% discount on a 2019E P/E basis. Given OMC’s high EPS growth profile since the recession, high FCF, and focus on returns to shareholders, we think the stock warrants a multiple more in-line with the market.
Interpublic For most of 2018, IPG maintained a slightly premium valuation to OMC, though at 11.5x it now trades at a discount, which we attribute to which we think reflects different trajectories for domestic growth this year (OMC is set to accelerate while IPG is likely to slow). Versus the market, IPG trades at a -34% discount, compared to an in-line valuation on average over the prior five years. To the extent it appears there is upside to IPG’s organic growth margin estimates, we believe there is room for modest multiple expansion in 2019.
WPP WPP shares trade primarily on the London Stock Exchange, though the company also has ADRs listed on the NASDAQ exchange that trade under the symbol WPPGY. WPP trades at a 2019E P/E of 9.1x, at a significant discount of -21% to PUB and -35% discount to MSCI Europe (vs. average of 9% premium since 2004).
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Publicis Publicis stock trades primarily on the Euronext exchange (where it trades as PUB; it is more commonly quoted on Reuters as PUBP.PA and on Bloomberg as PUB FP). Publicis removed its ADRs from the New York Stock Exchange in 2007 and listed over-the-counter (OTC) as PUBGY. Publicis trades at a 2019E PE of 11.5x, with the market giving PUB a substantial discount to MSCI Europe (-18% vs. historically trading at a +16% premium). Our estimates may well prove to be conservative but on a relative base we prefer WPP over Publicis in the European agency space.
Dentsu Dentsu does not look highly undervalued or overvalued compared with rivals based on FY2019 (2019E P/E of 14x based on adjusted EPS, EV/EBITDA of 8.2x). The stock consistently lacked undervaluation signs over the past two years as effects persisted from aggressive investment both in Japan and overseas, but we think top- line growth needs to strengthen before the valuation will regain its previous level at a premium to the industry average. The operating margin is unlikely to improve in FY2019 because aggressive investment is continuing, principally in Japan, but if top- line growth recovers we think profitability will improve from FY2020. We thus expect top-line conditions in FY2019 to greatly influence the share price.
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Company Profiles
The advertising and marketing services industry today is highly consolidated, with revenues largely concentrated in the top five holding companies: WPP, Omnicom, Publicis, Interpublic, and Dentsu. A second group of companies, which includes Havas, Hakuhodo DY, and MDC Partners is behind in terms of revenues. On the following pages, we provide snapshots of the leading global advertising and marketing services companies.
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WPP Group (Overweight)
Based in London, WPP Group is currently the largest advertising company in the world, with 2018 net sales of £12.8bn (and revenues of £15.6 bn). WPP’s major global ad agencies are J. Walter Thompson, Ogilvy & Mather, Y&R, and Grey. WPP is also the largest media buyer in the world with four top-flight media buying and planning concerns, Mindshare, MEC, MediaCom, and Maxus, which it has grouped together as GroupM (among other media agencies such as Essence and Xaxis). On the marketing services side, WPP is unique among its peers in having its Data Investment Management division, which includes leading market research firm Kantar (under strategic review). WPP’s Public Relations/Public Affairs group includes Hill & Knowlton, and its Branding & Identity, Healthcare, & Specialist Communications group includes direct and digital marketing companies such as Wunderman and Brand Union. WPP’s ex CEO, Sir Martin Sorrell resigned in 2018 and was replaced by Mark Read. WPP has set out its 3 year plan for “radical evolution” to return the business to growth. After many years of M&A driven growth & complexity, WPP plans to simplify the business to give clients better access to its expertise, and to drive revenue growth and cost efficiencies. We rate WPP Overweight.
Investment Thesis Simplified offering with stronger companies providing integrated solutions for clients. WPP is in the process of simplifying its structure with fewer, stronger companies that can provide clients with a holistic and integrated offering to help them optimize their spend both horizontally and vertically within the marketing funnel and across the entire customer experience / journey. Simplification to drive both revenue synergies and cost savings. WPP is moving to an “an agency flywheel” with network effects from shared data, technology & services. WPP has already merged some of its leading agency brands (Wunderman & JWT, and VML & Y&R) that represent c28% of revenues (ex Kantar) to create stronger companies that can better serve existing clients, upsell and cross-sell services, and realise cost savings that can be re-invested to support market share / growth. Valuation looks attractive. WPP trades on 9.4x earnings in 2020E for 2020- 23E EPS growth of c7% pa and it offers a 2019 dividend yield of 7%. WPP trades on a 17% discount to its US peers in 2020 - which trade on 11.4x earnings - highlighting the potential upside if it can deliver on its turnaround strategy. We maintain our OW rating. Outlook WPP expects organic growth of -1.5% to -2.0% for the full-year, with H1 weaker than H2 given 2018 client losses. The company expects the operating margin to be down around 100bps excluding the impact of IFRS 16. The application of IFRS 16 will increase the operating profit margin by c50 bps but will also add c£100m to interest with a net 1.3-1.6p reduction to EPS. WPP expects the impact to be broadly neutral by 2023.
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Valuation WPP trades on a 17% discount to its US peers in 2020—which trade on 11.4x earnings—highlighting the potential upside if it can deliver on its turnaround strategy. Our Dec-19 price target is 1,090p. Our DCF valuation assumes a WACC of 8.5%, terminal growth of 1.5% and operating margin of 15.1%. We maintain our OW rating.
Risks to Rating and Price Target worse-than-expected economic and advertising environment (particularly following Brexit) value-destroying acquisitions; costs may increase faster than expected, implying lower-than-expected operating margins; substantial number of client contracts lost due to peer competition on pricing; increased competition from Consultancy/IT firms could lead to market share loss.
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Figure 42:Net Sales by Geography, 2018A Figure 43: Net Sales by Segment, 2018A Data Investment AP, LA, AME, Management, CEE, 31% North 17% Public America, 35% Relations & Public Affairs, Advertising, 8% Media Investment Management, Brand 46% Consulting, Health & Wellness and Western Cont. Specialist Europe, 22% UK, 13% Comm., 28% Source: Company reports. Source: Company reports.
Figure 44: Major subsidiaries
Advertising Media Buying Data Investment Management PR Branding & ID Healthcare and Specialist Comms JWT Group M: Kantar Group Hill & Knowlton Landor Ogilvy & Mather Mindshare Ogilvy PR Brand Union Y&R MEC Burson-Marsteller Fitch Grey MediaCom Cohn & Wolfe Maxus Specialist PR
Source: Company reports.
Figure 45: Key Management Figure 46: Key Clients Executive Position Ford Nestle Mark Read CEO Unilever GSK Roberto Quarta Chairman P&G BP Paul Richardson Finance Director IBM Allianz John Seifert Chairman & CEO Oglivy & Mather Dell General Mills Tamara Ingram CEO J. Walter Thomptson J&J Pfizer David M. Sable CEO Y&R Colgate HSBC Michael Houston Chairman & CEO Grey Source: Company and media reports. Kelly Clark CEO GroupM Source: Company reports.
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Figure 47: Organic Revenue Growth, Q115-Q419E Figure 48: Headline Operating Margins, 2014-18E 6% 5% 5% 4% 17.4% 4% 3% 3% 3% 3% 17.3% 17.3% 3% 2% 2% 2% 1% 1% 1% 16.9% 0% 16.7% -1% 0% -1% 0% -2% -1%-1% -2% -2% -3% -2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY FY 15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 18E18E19E 2014 2015 2016 2017 2018E Source: Company reports and J.P. Morgan estimates. Note: Headline operating earnings exclude amortization of intangibles, goodwill impairment, and other non-cash write-downs , margin as % of net sales Source: Company reports and J.P. Morgan estimates.
Figure 49: Acquisitions 2000-2017 Figure 50: Reported Net New Business Wins £ in millions $ in millions 2000 281 2000 $4,500 2001 730 2001 2,500 2002 277 2002 3,600 2003 345 2003 3,600 2004 209 2004 6,800 2005 508 2005 5,200 2006 216 2006 6,411 2007 675 2007 2,370 2008 1029 2008 392 2009 118 2009 45 2010 200 2010 4,642 2011 470 2011 1,761 2012 567 2012 679 2013 201 2013 2,477 2014 489 2014 3,712 2015 693 2015 1,674 2016 697 2016 -2479 2017 285 2017 1,819 Note: Includes earnout payments. Source: Company reports. 2000 does not include Y&R (£3.0bn in stock) 2005 includes 50% of Grey (other 50% was £340m stock) Source: Company reports.
Figure 51: Balance sheet and cash flow position, 2018A Figure 52: Expected Earn-Out Payments Avg. Net debt/EBITDA 6.3x £ in millions Interest Cover 12.5x 2019 148 Eq. FCF* £1,165m 2020 140 FCF to firm* £1,745m 2021 39 Dividend 60p 2022 50 Source: J.P. Morgan estimates. * JPM definition. ** Company definition. 2023 20 2024+ 18 Total 415 Source: Company reports.
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Table 11: WPP Group—Income Statement £ in millions, except per share data 2015 2016 2017 2018 2019E 2020E 2021E
Net Sales 10,524 12,398 13,140 12,827 12,563 10,737 10,994 Reported growth 4.6% 17.8% 6.0% -2.6% -2.1% -14.5% 2.4% FX -1.2% 10.4% 4.6% -2.8% -0.6% -0.3% 0.0% M&A 2.5% 4.3% 2.3% 0.6% 0.6% -14.2% 1.1% Organic Growth 3.3% 3.1% -0.9% -0.4% -2.1% 0.0% 1.3%
Adjusted PBIT (Headline) 1,774 2,160 2,267 2,047 1,929 1,759 1,849 PBIT Margin on net sales 16.9% 17.4% 17.3% 16.0% 15.4% 16.4% 16.8% Change in margin +0.2% +0.6% -0.2% -1.3% -0.6% +1.0% +0.4%
Associates within headline PBIT 69 65 113 85 70 141 140 Adjusted Operating profit 1,705 2,095 2,154 1,962 1,859 1,618 1,710 Operating Margin 16.2% 16.9% 16.4% 15.3% 14.8% 15.1% 15.5% Change in margin -1.1% -0.5% +0.3% +0.5% Depreciation 228 260 267 264 275 235 240 Headline EBITDA (includes assoc) 2,002 2,420 2,534 2,311 2,203 1,994 2,089
Finance costs -152 -174 -175 -184 -270 -235 -211
Adjusted PBT 1,622 1,986 2,092 1,863 1,659 1,524 1,638 Tax -308 -417 -460 -419 -377 -346 -390 Tax rate 19% 21% 22.5% 22.5% 22.7% 22.7% 23.8% 23% PAT 1,314 1,569 1,632 1,444 1,282 1,178 1,248 Minorities -85 -102 -96 -81 -79 -79 -83 Net Income 1,229 1,467 1,536 1,363 1,203 1,100 1,165 80% Yr end shares 1,329 1,332 1,333 1,333 1,333 1,333 1,333 Treasury -38 -54 -71 -83 -84 -167 -192 Avg basic 1,291 1,278 1,261 1,248 1,250 1,179 1,144 Options/ issuable shares 22 18 15 13 11 11 11 Avg diluted Shares in issue 1,313 1,296 1,276 1,261 1,261 1,190 1,155
Adjusted EPS 94 113 120 108 95.5 92 101 Growth 10% 21% 6% -10% -12% -3% 9%
Interim 16 20 23 23 23 23 23 Final 29 37 37 37 37 37 37 DPS 45 57 60 60 60 60 60 Payout ratio 48% 50% 50% 56% 63% 65% 60% Source: Company reports, J.P. Morgan estimates.
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Omnicom Group (Overweight)
Based in New York, Omnicom Group is the second largest advertising company in the world with 2018 revenues of $15.3 billion. Omnicom was incorporated in 1986 and employs 70,400 people worldwide. The company is divided into three main advertising agency networks (BBDO Worldwide, DDB Worldwide, and TBWA Worldwide), which comprise a full range of traditional advertising as well as marketing services businesses; Omnicom has a stable of over 200 smaller independent agencies in its Diversified Agency Services (DAS) division as well. Over the years, Omnicom has shifted many marketing services agencies from its DAS division into these three main networks, essentially creating three mini holding companies. Omnicom’s Media Group now consists of three full-service media companies, with OMD Worldwide, PHD and Hearts & Science, as well as several media specialist companies, including data and analytics provider Annalect. Omnicom has historically stood out among its peers for a more “build” vs. “buy” approach toward growth with generally disciplined, small-scale acquisitions adding to organic growth. Its ROE and ROIC metrics likewise lead the group. We rate Omnicom Overweight.
Investment Thesis We view Omnicom as “best in class” in the group. Omnicom maintains a broad business mix with three top creative networks, a strong media buying segment, and stand-out data and analytics business. In addition, the company has demonstrated excellent cost management through business cycles, in our view, including the past recession where compression was far better than peers and Omnicom successfully returned to pre-recession profitability by 2012, on plan with guidance. Steady organic growth and flattish margin expected next year despite FX headwinds. Omnicom has targeted 2.0-3.0% organic revenue growth in 2019 against easier comps (+2.6% in 2018 vs. +3.0% in 2017). FX is forecast to be a headwind, and we estimate a -1.5% hit to revenue. Past divestitures will also drag on revenue growth, mainly in Q1 and Q2, and for the full year we model a -2.5% impact. OMC guided to flattish margins next year, but we continue to model around 25bps of expansion. We expect Omnicom’s historically robust share repurchases to continue, reflecting ongoing strong FCF. Outlook For 2019, management has initially targeted a 2.0-3.0% organic revenue increase. We expect growth to be back-end loaded as OMC cycles past some client losses. At Q4 earnings, the company guided FX to be a -1.5% headwind for the full year, compared to a 0.6% benefit in 2017. We also forecast a -2.5% impact from divestitures. OMC guided to flattish margins next year, but we continue to model around 25bps of expansion. We expect buybacks to be slightly ahead of last year, we forecast $600m this year, which should lead to EPS growth of 2.2%, by our estimate. Cash on hand remains near an all-time high, and net leverage is modest at 0.5x. Shares are currently trading at 8.5x our 2019E EBITDA and 8.2x on 2020E, and 12.8x our 2019E EPS and 12.2x on 2020E.
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Valuation Our $86 December 2019 price target reflects a forward P/E of 14.0x to our 2020 EPS estimate reflecting our confidence in the company’s growth and competitive position. A 14.0x multiple is a slight premium to OMC’s current NTM multiple, but is a discount to the broader market, which we view as conservative given OMC’s still consistent mid- to high-single-digit EPS growth profile and high FCF generation that is mostly returned to shareholders through buybacks and dividends. We note also that Omnicom has historically traded at a modest premium to the market, and our valuation is in line with the multiple we use for IPG.
Risks to Rating and Price Target Ad spending tracks GDP closely; so, a pullback in the U.S. and global economy can hurt Omnicom’s top and bottom lines. New business trends are unpredictable. If new business trends grow negative, top-line growth may come under pressure. The lagging European economy and any meaningful US dollar strength could weigh on earnings growth. While we are not overly concerned about rebates/kickbacks in the industry, ongoing news on this issue may weigh on shares.
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Figure 53: Revenues by Geography, 2018 Figure 54: Revenues by Segment, 2018 OMC Africa & Middle Specialty 7% Latin America East 3% 2% Asia Pacific 11%
CRM 30% Euro & Other Europe U.S. Advertising 19% 52% 54%
U.K. 10% PR 9% Other North America 3% Source: Company reports. Source: Company reports.
Figure 55: Major subsidiaries Global Advertising Networks Other Advertising Agencies Media Planning and Buying Marketing Services Interactive BBDO Goodby Silverstein OMD Rapp (Direct Marketing, Digital) Organic DDB GSD&M PHD Integer (Promotion and event) Proximity TBWA Zimmerman Hearts & Science Fleishman-Hillard (PR) Critical Mass Source: Company reports.
Figure 56: Key Management Figure 57: Key Clients Executive Position Media Creative John Wren President, CEO McDonald's Nissan P&G Ford Philip Angelastro EVP, CFO AT&T / WarnerMedia Pepsi Chuck Brymer CEO of DDB Daimler US Army Troy Ruhanen CEO of TBWA HSBC BMW Andrew Robertson CEO of BBDO Source: Company reports. Source: Company reports.
Figure 58: Organic revenue growth, 1Q16-4Q19E Figure 59: Operating margins, 2009-2019E
3.5% 3.0% 16.0% 13.76% 14.06% 2.6% 2.8% 13.64% 3.0% 2.5% 14.0% 12.7% 12.8% 12.7% 12.69% 13.03% 2.4% 12.1% 2.5% 11.7% 11.6% 12.0% 2.0% 1.5% 1.5% 10.0% 0.8% 1.0% 0.6% 8.0% 0.5% 0.2% 0.1% 6.0% 0.0% 4.0% -0.5% 2.0% -1.0% -0.5% -1.5% -1.1% 0.0% Q1, Q2, Q3, Q4, Q1, Q2, Q3, Q4, Q1, Q2, Q3, Q4, 17 17 17 17 18 18 18 18 19E 19E 19E 19E
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
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Figure 60: Acquisition Related Expenditures Figure 61: Balance sheet and cash flow position, 2018 $ in millions $ in millions, except per share data 2004 378 Total debt/EBITDA 2.0x 2005 327 Interest coverage 9.9x 2006 311 Credit Ratings BBB+ (S&P) 2007 378 Baa1 (Moody’s) 2008 492 FCF $1,376 2009 158 FCF/share $6.04 2010 184 Dividend $2.40 2011 443 Source: J.P. Morgan estimates. 2012 197 2013 112 2014 228 2015 152 2016 492 2017 361 2018 493 Source: Company reports and J.P. Morgan estimates.
Figure 62: Expected Potential Earn-Out Payments $ in millions 2018 $ 93 2019-2020 47 2021-2022 76 After 2022 0 Total 216 Source: Company reports.
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Figure 63: Omnicom Group — Income Statement $ in millions Q1, 18 Q2, 18 Q3, 18 Q4, 18 Q1, 19E Q2, 19E Q3, 19E Q4, 19E 2017 2018 2019E 2020E United States Revenue $1,917.7 $2,038.0 $2,015.7 $2,147.3 $1,871.6 $2,010.7 $2,032.6 $2,157.7 $8,196.9 $8,118.7 $8,072.5 $8,234.0 Organic % change 0.1% -0.5% 0.6% 2.6% 1.5% 3.0% 2.8% 2.5% 0.5% 0.7% 2.4% 2.0% Acquisition % change -4.8% -0.6% 0.6% -1.9% -2.0% -2.0% -0.8% -0.5% -5.5% -1.7% -1.3% 0.0% Total % change -4.7% -1.1% 1.2% 0.7% -2.4% -1.3% 0.8% 0.5% -5.0% -1.0% -0.6% 2.0% International Revenue 1,754.4 1,870.6 1,715.7 1,977.0 1,594.7 1,752.0 1,669.1 2,004.9 7,076.7 7,317.7 7,020.7 7,301.5 Organic % change 5.4% 5.1% 5.6% 3.7% 2.7% 2.8% 2.8% 3.7% 6.2% 4.9% 3.0% 4.0% Acquisition % change -3.6% -1.5% -2.7% -3.0% -5.5% -4.0% -4.0% -2.0% -2.5% -2.7% -3.8% 0.0% F/X % change 9.6% 4.6% -3.6% -4.1% -6.0% -5.0% -1.8% 0.0% 0.6% 1.2% -3.1% 0.0% Total % change 11.3% 8.2% -0.7% -3.3% -9.1% -6.3% -2.7% 1.4% 4.2% 3.4% -4.1% 4.0% Total Revenues 3,629.6 3,859.6 3,714.3 4,086.7 3,466.3 3,762.7 3,701.6 4,162.5 15,273.6 15,290.2 15,093.2 15,535.5 Total organic % change 2.4% 2.0% 2.9% 3.2% 2.1% 2.9% 2.8% 3.1% 3.0% 2.6% 2.7% 2.9% Total acquisition % change -4.3% -1.0% -0.9% -2.4% -3.7% -3.0% -2.3% -1.2% -4.2% -2.1% -2.5% 0.0% F/X % change 4.2% 2.1% -1.7% -2.0% -2.9% -2.4% -0.8% 0.0% 0.3% 0.6% -1.5% 0.0% Total % change 1.2% 1.8% -0.1% -2.2% -4.5% -2.5% -0.3% 1.9% -0.9% 0.1% -1.3% 2.9%
Salary and service costs 2,712.8 2,772.9 2,760.5 2,986.4 2,593.2 2,705.9 2,753.7 3,044.7 11,227.5 11,232.6 11,097.5 11,432.0 % of revenue 74.7% 71.8% 74.3% 73.1% 74.8% 71.9% 74.4% 73.1% 73.5% 73.5% 73.5% 73.6% Occupancy and other costs 320.3 319.6 303.3 292.9 299.0 302.2 293.0 285.8 1,240.7 1,236.1 1,180.0 1,210.7 % of revenue 8.8% 8.3% 8.2% 7.2% 8.6% 8.0% 7.9% 6.9% 8.1% 8.1% 7.8% 7.8% SG&A 105.4 117.4 111.3 119.0 97.2 110.7 107.2 117.0 439.7 453.1 432.1 437.0 % of revenue 2.9% 3.0% 3.0% 2.9% 2.8% 2.9% 2.9% 2.8% 2.9% 3.0% 2.9% 2.8% Depreciation and amortization 69.4 67.4 65.9 61.3 66.0 66.0 65.0 65.0 282.2 264.0 262.0 267.5 % of revenue 1.9% 1.7% 1.8% 1.5% 1.9% 1.8% 1.8% 1.6% 1.8% 1.7% 1.7% 1.7% Amortiation of intangtibles 27.5 27.0 25.2 22.8 25.0 25.0 24.0 24.0 113.8 102.5 98.0 96.0 Depreciation 41.9 40.4 40.7 38.5 41.0 41.0 41.0 41.0 168.4 161.5 164.0 171.5
Operating income 421.7 582.3 473.3 627.2 411.0 577.9 482.7 649.9 2,083.5 2,104.5 2,121.5 2,188.2 % of revenue 11.6% 15.1% 12.7% 15.3% 11.9% 15.4% 13.0% 15.6% 13.6% 13.8% 14.1% 14.1% % change 1.4% 1.9% 0.7% 0.2% -2.5% -0.8% 2.0% 3.6% 3.7% 1.0% 0.8% 3.1% Net interest expense (income) 46.9 52.5 56.7 53.1 53.7 53.7 51.2 50.7 198.7 209.2 209.3 219.5 Income before taxes 374.8 529.8 416.6 574.1 357.3 524.2 431.5 599.2 1,884.8 1,895.2 1,912.2 1,968.7 Income tax provision 90.9 136.7 111.4 149.7 96.5 141.5 116.5 161.8 589.9 488.7 516.3 531.6 Tax rate 24.3% 25.8% 26.7% 26.1% 27.0% 27.0% 27.0% 27.0% 31.3% 25.8% 27.0% 27.0% Income after taxes 283.9 393.1 305.2 424.4 260.8 382.7 315.0 437.4 1,294.9 1,406.5 1,395.9 1,437.2 Equity in affiliates/minority interests (19.8) (28.9) (24.5) (25.2) (18.9) (28.7) (23.7) (24.6) (100.2) (98.4) (96.0) (99.2) Net income 264.1 364.2 280.7 399.2 241.9 353.9 291.3 412.8 1,194.7 1,308.1 1,299.9 1,338.0 Addbacks - (0.1) ------(1.6) (0.1) - - Adjusted net income 264.1 364.1 280.7 399.2 241.9 353.9 291.3 412.8 1,193.1 1,308.0 1,299.9 1,338.0 Avg. shares outstanding 231.5 228.1 225.9 225.6 224.2 221.5 220.2 220.0 233.9 227.8 221.5 216.6 Diluted EPS, recurring $1.14 $1.60 $1.24 $1.77 $1.08 $1.60 $1.32 $1.88 $5.10 $5.74 $5.87 $6.18 % change 11.8% 13.8% 9.8% 14.0% -5.4% 0.1% 6.4% 6.1% 6.8% 12.6% 2.2% 5.3%
EBITDA 491.1 649.7 539.2 688.5 477.0 643.9 547.7 714.9 2,365.6 2,368.5 2,383.5 2,455.7 % of revenue 13.5% 16.8% 14.5% 16.8% 13.8% 17.1% 14.8% 17.2% 15.5% 15.5% 15.8% 15.8% % change 0.6% 1.1% 0.1% -1.1% -2.9% -0.9% 1.6% 3.8% 2.8% 0.1% 0.6% 3.0%
EBITA 449.2 609.3 498.5 650.0 436.0 602.9 506.7 673.9 2,197.3 2,207.0 2,219.5 2,284.2 % of revenue 12.4% 15.8% 13.4% 15.9% 12.6% 16.0% 13.7% 16.2% 14.4% 14.4% 14.7% 14.7% % change 0.7% 1.5% 0.1% -0.5% -2.9% -1.0% 1.7% 3.7% 3.4% 0.4% 0.6% 2.9% Source: Company reports, J.P. Morgan estimates.
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Interpublic Group (Overweight)
Based in New York, Interpublic Group of Companies is the fourth-largest advertising group in the world with 2018 net revenues of $8.0 billion. The company comprises three fully integrated advertising/marketing communications divisions, McCann Worldgroup, FCB (formerly Draftcfb), and MullenLowe Group; media specialists including UM and Initiative, which operate under the company’s IPG Mediabrands unit; leading specialist and marketing services agencies, including PR firm Weber Shandwick and experiential marketing firm Jack Morton; plus a collection of stand- alone domestic agencies such as Hill-Holliday and The Martin Agency. Interpublic was founded in 1930 as McCann Erickson (it has operated under the name Interpublic since 1961) and currently employs 54,000. Over the past ten years, Interpublic has effectively managed a turnaround of the company after a period of poor financial performance, accounting issues, and management turnover. Current management has successfully brought the company back to above-average organic revenue performance, much improved profitability, and, in our view, the strongest balance sheet in the group. We rate Interpublic Overweight.
Investment Thesis 2019 outlook encouraging. Following a modest 1.8% organic growth between in 2017, IPG posted in 5.5% organic growth in 2018, significantly outperforming peers. The acceleration, in our view, was driven by an increase in client spending, and importantly growth was broad based by both geography and business segment, driven by many different client verticals including auto, healthcare, CPG and retail suggesting this momentum can continue. Management guided to 2%-3% organic revenue growth in 2019 which we think may be conservative despite some expected moderation given very difficult comparisons and several client losses (FCA media, US Army) that will be a modest headwind especially for the US, beginning in Q2’19. We model 2.7% organic growth for the year. On the margin side, management has guided to 40-50bps of improvement both from ongoing leverage in the core business and some benefit from the Acxiom acquisition (roughly 10% of revenues but a higher margin business). We look for EPS growth of 0.6% to $1.87 after a 33% growth in 2018. IPG will continue to make progress on closing margin gap with peers. IPG grew its operating margins by 40bps to 13% last year, relative to a 12bps improvement to 13.8% at domestic peer OMC. We forecast Interpublic will resume closing the gap versus peers in 2019, partially helped by the acquisition of Acxiom (roughly 10% of revenues but a higher margin business). Outlook Management has provided 2019 guidance for organic revenue growth of 2-3%, and we additionally model an FX headwind of -1% for the full year. The company is also looking for 40-50bps of margin improvement, and we model operating income growth of 6.7%. Tax rate is currently expected to be approximately 27%, up slightly from 25% in 2018. Based on this guidance, and our assumption that IPG does not repurchase stock this year, we look for 2019 EPS growth of +0.6% off a tough comp of +33% growth in 2018. Shares have outperformed YTD, reflective in our view of the company's better Q4 results and upbeat tone on the post-earnings call. Even so, IPG shares are trading at 11.5x our 2019 EPS and 10.7x 2020 EPS, a 34% discount to the market despite trading roughly in-line on average over the prior 5 year period. As IPG delivers growth as projected in 2019, showing continued strong performance
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like last year’s levels, we believe the stock’s multiple may also expand toward its historical levels.
Valuation Our $28 December 2019 price target reflects a forward P/E of 14.0x to our 2020 EPS estimate, a slight premium to IPG’s current NTM multiple. We view this as conservative relative to the S&P at 17.4x given IPG’s long-term HSD earnings growth outlook, strong balance sheet (now with a fully investment grade credit rating), and FCF generation.
Risks to Rating and Price Target Ad spending tracks GDP closely, so if US trends begin to worsen again, it would likely hurt Interpublic’s top line. Depressed spending by FMCG companies may last longer than expected leading to further negative earnings revisions ahead. Recent new business trends have improved, but if they deteriorate, our revenue outlook for 2019 may be too optimistic.
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Figure 64: Revenues by Geography, 2018 Figure 65: Revenues by Discipline, 2018 IPG
Latin America Other 5% 6%
Asia/Pacific 11% Marketing Services 45% Continental Europe Advertising & 9% U.S. Media 60% 55% UK 9%
Source: Company reports. Source: J.P. Morgan Estimates
Figure 66: Major subsidiaries Global Advertising Networks Other Advertising Agencies Media Planning and Buying Marketing Services Interactive McCann Worldgroup Deutsch Universal McCann (UM) FCB R/GA FCB Hill Holliday Initiative Jack Morton (experiential marketing) MRM/McCann MullenLowe Group The Martin Agency Weber Shandwick Huge Acxiom Source: Company reports.
Figure 67: Key Management Figure 68: Key Clients Executive Position Creative Media Michael Roth Chairman, CEO GM American Express Frank Mergenthaler EVP, CFO Unilever Coca-Cola Henry Tajer CEO, Mediabrands Verizon Johnson & Johnson Harris Diamond CEO, McCann Erickson Microsoft Amazon Carter Murray CEO, FCB Source: Company reports Source: Company reports.
Figure 69: Organic revenue growth, 1Q17-4Q19E Figure 70: Operating margins, 2009-2019E
8.0% 14.0% 12.6% 13.0% 12.8% 7.1% 12.0% 7.0% 11.5% 12.0% 10.5% 5.6% 9.8% 9.8% 6.0% 5.4% 9.3% 10.0% 8.4% 5.0% 8.0% 3.6% 3.6% 4.0% 3.3% 5.7% 6.0% 2.7% 2.5% 2.8% 3.0% 2.1% 4.0% 2.0% 1.0% 0.4% 0.5% 2.0% 0.0% 0.0% Q1, Q2, Q3, Q4, Q1, Q2, Q3, Q4, Q1, Q2, Q3, Q4, 17 17 17 17 18 18 18 18 19E 19E 19E 19E
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Figure 71: Acquisitions $ in millions 2001 $ 311 2002 277 2003 225 2004 175 2005 92 2006 31 2007 151 2008 106 2009 72 2010 62 2011 63 2012 146 2013 62 2014 68 2015 29 2016 52 2017 31 2018 2,310 Source: Company reports and J.P. Morgan estimates.
Figure 72: Balance sheet and cash flow position, 2018 Figure 73: Expected Potential Earn-Out Payments $ in millions, except per share data $ in millions Total Debt/EBITDA 2.6x 2018 $ 79 Interest coverage 7.9x 2019 54 Covenants 2020 79 Interest Coverage over 5x 2021 35 Leverage under 4x 2022 11 EBITDA $1,329 Thereafter 10 FCF $840 Total 268 FCF/share $2.16 Dividend $0.84 Source: Company reports.
Source: Company reports; J.P. Morgan.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Figure 74: Interpublic Group—Income Statement $ in millions, except per share data INCOME STATEMENT Q1, 18 Q2, 18 Q3, 18 Q4, 18 Q1, 19E Q2, 19E Q3, 19E Q4, 19E 2017 2018 2019E 2020E Revenue Breakdown U.S. Revenue $1,092.3 $1,171.5 $1,160.9 $1,400.3 $1,286.5 $1,355.7 $1,343.4 $1,429.7 $4,458.8 $4,825.0 $5,415.4 $5,621.2 Organic Change 4.3% 4.6% 5.0% 6.3% 3.5% 2.50% 1.70% 2.6% 2.2% 5.1% 2.6% 3.0% Acquisition Change -0.9% -0.8% -0.4% 13.9% 14.3% 13.2% 14.0% -0.5% -1.5% 3.1% 9.7% 0.8% Total U.S. Change -1.8% 0.9% 0.4% 8.9% 21.7% 20.2% 21.1% 22.8% 0.6% 8.2% 12.2% 3.8% International Revenue 681.7 776.7 734.8 1,013.4 670.7 773.0 769.0 1,038.7 3,014.7 3,206.6 3,251.4 3,381.5 Organic Change 2.6% 7.2% 6.0% 8.0% 3.8% 2.6% 2.8% 3.0% 1.2% 6.2% 3.0% 3.0% Acquisition Change -0.3% -0.9% -1.1% 0.5% 1.6% 1.5% 1.9% -0.5% -0.9% -0.4% 1.0% 1.0% F/X Change 8.0% 3.5% -3.3% -3.6% -7.0% -4.5% 0.0% 0.0% -0.1% 0.5% -2.6% 0.0% Total International Change 10.3% 9.9% 1.6% 4.8% -1.6% -0.5% 4.7% 2.5% 0.2% 6.4% 1.4% 4.0% Total Organic Revenues ($ Change) 60.9 103.6 98.9 150.6 64.1 49.2 40.3 66.8 414.0 220.4 260.0 Total Acquisition Revenues ($ Change) -11.7 -14.9 -12.2 167.0 166.8 166.3 176.4 -12.1 128.2 497.5 75.8 Total F/X Revenues ($ Change) 49.5 24.9 (23.5) (35.0) (47.7) (35.0) - - 15.9 (82.7) - Net Revenue $1,774.0 $1,948.2 $1,895.7 $2,413.7 $1,957.2 $2,128.7 $2,112.4 $2,468.4 $7,473.5 $8,031.6 $8,666.8 $9,002.7 Billable expense 395.1 443.6 401.8 442.3 435.9 484.7 447.7 452.3 1,574.1 1,682.8 1,820.7 1,891.2 Total Revenues $2,169.1 $2,391.8 $2,297.5 $2,856.0 $2,393.1 $2,613.4 $2,560.2 $2,920.8 $9,047.6 $9,714.4 $10,487.5 $10,893.9 % Change 5.9% 6.2% 3.4% 13.3% 10.3% 9.3% 11.4% 2.3% 0.5% 7.5% 7.9% 3.9% Total Organic Revenue Change 3.6% 5.6% 5.4% 7.1% 3.6% 2.5% 2.1% 2.8% 1.8% 5.5% 2.7% 3.0% Total Acquisition Revenue Change -0.7% -0.8% -0.7% 7.8% 9.4% 8.5% 9.3% -0.5% -1.3% 1.7% 6.2% 0.9% Total F/X Revenue Change 3.0% 1.4% -1.3% -1.6% -2.7% -1.8% 0.0% 0.0% 0.0% 0.2% -1.0% 0.0%
Salaries and related expenses 1,330.3 1,292.9 1,251.4 1,423.7 1,424.9 1,394.3 1,377.3 1,470.0 4,990.7 5,298.3 5,666.4 5,886.0 % of net revenue 75.0% 66.4% 66.0% 59.0% 72.8% 65.5% 65.2% 59.6% 66.78% 65.97% 65.38% 65.4% Office and general expenses 323.8 333.3 317.0 381.0 361.3 369.9 345.7 382.4 1,268.8 1,355.1 1,459.3 1,499.6 % of net revenue 18.3% 17.1% 16.7% 15.8% 18.5% 17.4% 16.4% 15.5% 17.0% 16.87% 16.84% 16.7% Billable expenses 395.1 443.6 401.8 442.3 435.9 484.7 447.7 452.3 1,574.1 1,682.8 1,820.7 1,891.2 Cost of Services 2,049.2 2,069.8 1,970.2 2,247.0 2,222.1 2,248.9 2,170.7 2,304.7 7,833.6 8,336.2 8,946.4 9,276.8
Selling, general and administrative expenses 35.1 27.4 10.6 58.4 38.7 31.5 21.1 42.0 118.5 131.5 133.3 138.4 % of net revenue 2.0% 1.4% 0.6% 2.4% 2.0% 1.5% 1.0% 1.7% 1.6% 1.6% 1.5% 1.5% Depreciation and amortization 46.0 44.0 44.0 68.9 76.0 74.0 74.0 70.3 157.1 202.9 294.3 300.2 % of net revenue 2.6% 2.3% 2.3% 2.9% 3.9% 3.5% 3.5% 2.8% 2.1% 2.5% 3.4% 3.3%
Intangibles amortization 5.3 5.2 5.1 22.0 22.0 22.0 22.0 22.0 21.1 37.6 88.0 88.0 EBITA 44.1 255.8 277.8 503.7 78.3 281.0 316.3 525.8 959.5 1,081.4 1,201.5 1,266.4 % change 10.3% 10.7% 6.8% 17.6% 77.6% 9.9% 13.9% 4.4% 12.7% 11.1% 5.4% EBITA Margin 2.5% 13.1% 14.7% 20.9% 4.0% 13.2% 15.0% 21.3% 12.8% 13.5% 13.9% 14.1% EBITA. margin chg. y/y 0.10% 0.54% 0.46% 0.77% 1.51% 0.07% 0.32% 0.43% 0.63% 0.40% 0.20%
Total costs and expenses 2,130.3 2,141.2 2,024.8 2,374.3 2,336.8 2,354.4 2,265.8 2,416.9 8,109.2 8,670.6 9,374.0 9,715.5
Income from operations 38.8 250.6 272.7 481.7 56.3 259.0 294.3 503.8 938.4 1,043.8 1,113.5 1,178.4 % Change 11.8% 11.0% 6.9% 13.9% 45.1% 3.4% 7.9% 4.6% -0.2% 11.2% 6.7% 5.8% Operating Margin 2.2% 12.9% 14.4% 20.0% 2.9% 12.2% 13.9% 20.4% 12.6% 13.0% 12.8% 13.1% Op. margin chg. y/y 0.12% 0.56% 0.47% 0.11% 0.69% -0.69% -0.45% 0.45% 0.37% 0.44% -0.15% 0.24%
Interest expense (19.9) (26.1) (24.3) (49.4) (50.0) (50.0) (50.0) (50.0) (90.8) (119.7) (200.0) (185.5) Interest income and net other 4.0 4.7 5.3 6.1 4.5 4.5 4.5 4.5 19.4 20.1 18.0 18.0 Investment impairment 3.5 0.8 (1.2) 4.3 0.0 - Income before provision for income taxes 22.9 232.7 254.5 438.4 10.8 213.5 248.8 458.3 865.8 948.5 931.5 1,010.9 Provision for income taxes 13.1 63.6 67.6 92.3 2.9 57.7 67.2 123.8 314.7 236.6 251.5 272.9 Tax rate 57.2% 27.3% 26.6% 21.1% 27.0% 27.0% 27.0% 27.0% 36.3% 24.9% 27.0% 27.0% Income of consolidated companies 9.8 169.1 186.9 346.1 7.9 155.9 181.6 334.6 551.1 711.9 680.0 737.9 Equity in net income of unconsolidated affiliates (1.9) (0.1) 0.1 0.8 (0.5) - (0.5) 1.5 0.9 (1.1) 0.5 1.0 (Income)/loss applicable to minority interests 2.0 (2.0) (2.5) (16.3) 2.0 (2.0) (3.5) (18.0) (16.0) (18.8) (21.5) (23.0) Net income $ 9.9 $ 167.0 $ 184.5 $ 330.6 $ 9.4 $ 153.9 $ 177.6 $ 318.1 $536.0 $692.0 $659.0 $715.9 Net Margin 0.5% 7.0% 8.0% 11.6% 0.4% 5.9% 6.9% 10.9% 5.9% 7.1% 6.3% 6.6% Net income (including discontinued ops) $9.9 $167.0 $184.5 $330.6 $9.4 $153.9 $177.6 $318.1 $536.0 $692.0 $659.0 $715.9 Add-back for intangibles amortization 5.1 5.1 4.8 17.8 17.8 17.8 17.8 17.8 20.0 32.8 71.3 71.3 Basic shares outstanding 383.4 383.6 382.6 383.4 386.0 386.2 386.4 386.6 389.7 383.3 386.3 386.3 Diluted shares outstanding 388.6 389.5 388.4 390.3 391.2 391.4 391.6 391.8 397.5 389.2 391.5 390.5
Diluted EPS, operating $ 0.04 $ 0.44 $ 0.49 $ 0.89 $ 0.07 $ 0.44 $ 0.50 $ 0.86 $ 1.40 $ 1.86 $ 1.87 $ 2.02 % Change -28.3% 64.1% 58.7% 13.5% 80.2% -0.7% 2.4% -4.0% 2.3% 33.1% 0.2% 8.1%
EBITDA $116.2 $309.2 $316.7 $573.1 $165.6 $348.5 $382.8 $598.0 $1,177.5 $1,328.9 $1,495.0 $1,571.0 % Change 15.7% 17.1% 15.1% 0.0% 57.1% 23.0% 23.1% 25.2% -0.7% 12.9% 12.5% 5.1% % of Revenues 5.4% 12.9% 13.8% 20.1% 6.9% 13.3% 15.0% 20.5% 13.0% 13.7% 14.3% 14.4% Source: Company reports and J.P. Morgan estimates.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Publicis Groupe (Neutral)
Publicis is the third-largest advertising and marketing services company in the world, with 2018 revenues of €8.9 billion. Publicis has grown rapidly through acquisitions, having bought Saatchi & Saatchi and Fallon in 2000, Bcom3 (which brought in Leo Burnett and Starcom MediaVest) in 2002, Digitas in 2007, Razorfish in 2009, Rosetta in 2011, and Sapient in 2014. Publicis owns two exceptionally strong media buying operations, ZenithOptimedia and Starcom MediaVest (recently rebranded in the restructuring as Starcom and Zenith). Its marketing services businesses are grouped as Specialized Agencies and Marketing Services (SAMS) and include health care marketing, PR, and sports marketing. We rate Publicis Neutral.
Publicis is based in Paris, where the stock trades on Euronext as PUB (quoted on Reuters as PUBP.PA and on Bloomberg as PUB FP); its ADRs were delisted from NYSE in 2007 and now trade OTC as PUBGY.
Investment Thesis Publicis’s trading revenues remain volatile with Q4 revenues having been weak with organic revenue growth of -0.3% (versus consensus expectations at +2.5% at the time). Current weakness appears in particular to be driven by N America for Publicis and management stated that the business "suffers from higher-than- expected attrition in traditional advertising, mainly from several FMCG clients in the US". However, a solid execution on costs and a new €400m share buyback program (due to lack of M&A options) provides upside. Publicis's core advertisers are spending less which increasingly is becoming a structural (rather than cyclical) issue. However, we do believe our current estimates for +0.9%/+0.1% in 19E/20E may prove too conservative with the company still targeting +4% organic revenue growth in 2020E together with margin improvement. At this level, we prefer WPP over Publicis on valuation grounds and better self help optionality. Figure 75: Quarterly organic growth for Publicis 5.0%
3.5% 3.2% 3.3% 2.9% 2.8% 2.7% 2.2%1.9% 1.3% 1.0% 1.4% 1.2% 1.3% 0.7% 0.9% 0.8% 0.5% 0.7% 0.1% -0.3% 0.2% 0.1% -1.2% -1.4% -2.4%
Source: Company, J.P. Morgan Research.
Strong balance sheet and shareholder returns. Publicis’s balance sheet remains strong, in our view, with 2018 Net debt/EBITDA of 0.5x. We believe this leaves scope for further shareholder returns or value enhancing acquisitions.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Outlook Publicis expects FY19 net revenue organic growth to accelerate YoY from +0.1% reported for FY18, (cons +1.9%, JPMe +0.9%) yet expect high attrition to continue. Management also reiterated medium term guidance of +4% organic growth for FY20 (cons +2%) and +30-50bps margin improvement in 2019 and 2020 (cons +20bps). Generally we believe our estimates might turn out to be too conservative. We keep the view that advertisers, in particular FMCG companies are likely to return to the ad market given ongoing weakness in (their) top line momentum. Valuation We value all Agencies on a DCF basis. Our Dec 2019 target price of €56 is based on a WACC of 8% and terminal growth rate of 2%. Risks to Rating and Price Target Worse-than-expected economic and advertising environment following Brexit. Disruption to underlying business as a result of management distraction from structural changes Significant loss of media/creative accounts Increased competition from IT/Consultancy firms Value destroying acquisitions
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Figure 76: Revenues by Geography, 2018 Figure 77: Revenues by Segment, 2018E Latin America Middle East & 4% Africa Analogue & Digital Media = 25% Asia Pacific 3% 10%
Europe Specialised Analog Media,Digital Media, 29% Agencies and 12% 13% Marketing services, 13%
North America Digital, 52% 54%
Advertising, 23% Source: Company reports.
Source: Company reports Figure 78: Major subsidiaries Advertising Agencies Media Agencies Digital Agencies Technology Specialised Agencies Publicis Worldwide Zenith Optimedia Razorfish* Vivaki Publicishealthcare Saatchi & Saatchi Starcom Mediavest Rosetta MSL group Leo Burnett Group DigitasLBi Medias & Regies Europe BBH Nurun Prodigious Sapient* Source: Company reports, *Razorfish and SaipientNitro have recently merged into one entity
Figure 79: Key Management Figure 80: Key Clients Executive Position Client Maurice Lévy Chairman of supervisory board Procter & Gamble Samsung Arthur Sadoun CEO Renault Bank of America Jean-Michel Étienne CFO Fiat Chrysler Nestlé Steve King CEO, Publicis Media Citigroup MillerCoors Alan J. Herrick CEO, Publicis.Sapient Kraft AstraZenica Rishad Tobaccowala Chief Strategist Verizon Carrefour Source: Company reports. Source: Company reports
Figure 81: Quarterly organic revenue growth, Q115-2019E Figure 82: Operating margins, 2008-2019E
1.4% 2.9% 1.9% 17.0% 2.8% 2.2% 0.7% 2.7% 16.0% 16.1% 15.9% 16.3% 16.1% 15.8% 15.5% 15.6% 0.9% 0.2% 0.8% 15.0% 1.2% 0.1% 1.3% 0.1%
-1.2% -0.3% -1.4% -2.4% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E
Source: Company reports and J.P. Morgan estimates 2014 was 14.9% excl. merger related Source: Company reports and J.P. Morgan estimates. costs. Lower margin from 2015 reflects the consolidation of Sapient
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Figure 83: Acquisitions Figure 84: Reported Net New Business Wins € in millions $ in millions 2002 75 2000 $1,400 2003 200 2001 2,000 2004 124 2002 2,000 2005 (164) 2003 4,000 2006 58 2004 4,400 2007 996 2005 9,800 2008 172 2006 3,700 2009 287 (inc Razorfish) 2007 5,000 2010 169 2008 5,000 2011 698 (inc Rosetta) 2009 6,000 2012 529 2010 5,900 2013 775 (inc LBi) 2011 7,900 2014 559 2012 3,500 2015 3,265 (inc Sapient) 2013 4,500 2016 240 2014 (678) Note: Net of disposals. Includes earn-outs/buy- 2015 (2,518) outs. ’09/’10/’11/’12/’13/’14 from company 2016 (1,074) presentation, cash flow 2017 -364 2002 does not incl. Bcom3 (€3,432m stock) Source: Company reports and J.P. Morgan estimates, no longer reported post 2013. Source: Company reports and J.P. Morgan estimates.
Figure 85: Balance sheet and cash flow position, 2018A Average Net debt/EBITDA 0.5x Interest Cover 24.4x Eq. FCF* €1,743m FCF to firm* €1,939m Dividend €2.12 Source: J.P. Morgan estimates. * JPM definition. ** Company definition.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Table 12: Publicis Groupe — Income Statement € in millions, except per share data 2014 2015 2016E 2017 2018 2019E 2020E Total revenues 7,255 9,601 9,733 9,332 8,969 9,097 9,033 y/y change (%) 4.3% 32.3% 1.4% -4.1% -3.9% 1.4% -0.7% y/y organic 2.0% 1.5% 0.7% 0.8% 0.1% 0.9% 0.1% Personnel expenses (4,506) (5,988) (6,059) (5,977) (5,747) (5,671) (5,551) y/y change (%) 4.1% 32.9% 1.2% -1.4% -3.8% -1.3% -2.1% as % of sales -62.1% -62.4% -62.3% -64.0% -64.1% -62.3% -61.5% o/w Fixed personnel expenses (3,968) (5,197) (5,268) (5,277) (4,968) (4,994) (4,878) as % of sales -54.7% -54.1% -54.1% -56.5% -55.4% -54.9% -54.0% o/w Independent contractor (295) (414) (444) (374) (367) (372) (370) as a % of sales -4.1% -4.3% -4.6% -4.0% -4.1% -4.1% -4.1% o/w Restructuring costs (69) (118) (73) (120) (104) (104) (104) o/w other (174) (259) (274) (206) (308) (201) (199) as a % of sales -2.4% -2.7% -2.8% -2.2% -2.2% -2.2% -2.2% Other operating expenses (excl impairments) (1,442) (1,952) (1,992) (1,689) (1,173) (1,910) (1,942) y/y change (%) 3.3% 35.4% 2.0% -13.5% -41.1% 13.1% 65.6% as % of sales -19.9% -20.3% -20.5% -18.1% -13.1% -21.0% -21.5% o/w Sales costs (326) 0 0 0 0 0 0 as % of sales -4.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Statutory EBITDA 1,307 1,661 1,682 1,666 2,049 1,515 1,540 y/y change (%) 6.5% 27.1% 1.3% -1.0% 23.0% -26.0% 1.6% as a % of sales 18.0% 17.3% 17.3% 17.9% 22.8% 16.7% 17.0% D&A (ex intangibles from acquisitions) (125) (174) (166) (161) (526) (150) (145) y/y change (%) 4.2% 39.2% -4.6% -3.0% 226.7% -71.5% -3.7% As a % of sales -1.7% -1.8% -1.7% -1.7% -1.7% -1.7% -1.6% Underlying EBITDA 1,324 1,661 1,682 1,666 2,049 1,515 1,540 Statutory EBITA 1,182 1,487 1,516 1,505 1,523 1,365 1,396 y/y change (%) 6.8% 25.8% 2.0% -0.7% 1.2% -10.4% 2.2% as a % of sales 16.3% 15.5% 15.6% 16.1% 17.0% 15.0% 15.4% M&A costs -7 0 0 0 0 0 0 Underlying Operating Income 1,189 1,487 1,516 1,505 1,523 1,365 1,396 as a % of sales 16.4% 15.5% 15.6% 16.1% 17.0% 15.0% 15.4% Amortisation of intangibles from acquisitions (51) (89) (79) (73) (69) (69) (69) Impairment (72) (28) (1,440) (115) (131) (131) (131) Non current income/(expenses) 10 8 12 -1 -20 -20 -20 Statutory EBIT 1,069 1,378 9 1,316 1,303 1,145 1,176 as a % of sales 14.7% 14.4% 0.1% 14.1% 14.5% 12.6% 13.0% Underlying EBIT 1,199 1,487 1,516 1,505 1,523 1,365 1,396 margin % 16.5% 15.5% 15.6% 16.1% 17.0% 15.0% 15.4% Underlying Finance costs (29) (89) (182) (127) (84) (107) (117) PBT 1,041 1,289 -173 1,189 1,219 1,038 1,059 Underlying PBT 1,170 1,398 1,334 1,378 1,439 1,258 1,279 Statutory tax (311) (386) (342) (312) (285) (280) (275) Statutory tax rate (%) -29.9% -29.9% 197.7% -26.2% -23.4% -27.0% -26.0% Underlying tax (331) (416) (415) (358) (374) (327) (332) Underlying tax rate (%) -28.3% -29.8% -31.1% -26.0% -26.0% -26.0% -26.0% Associates 4 8 -5 -5 -4 -3 -3 y/y change (%) -20.0% 100.0% -162.5% 0.0% -20.0% -14.8% 2.0% Statutory Net Income reported 734 911 (520) 872 930 755 780 y/y change (%) -9.3% 24.1% -157.1% -267.7% 6.7% -18.9% 3.4% Minority interest (14) (10) (7) (10) (11) (9) (9) y/y change (%) -17.6% -28.6% -30.0% 42.9% 10.0% -18.9% 3.4% Statutory Net Income equity holders 720 901 (527) 862 919 746 771 y/y change (%) -9.1% 25.1% -158.5% -263.6% 6.6% -18.9% 3.4% Underlying Net Income to equity holders 828 992 1,015 1,005 1,050 919 934 y/y change (%) 4.5% 19.8% 2.3% -1.0% 4.5% -12.5% 1.6% Nb of shares (m) 223.9 222.7 223.5 226.4 229.2 222.0 224.0 Diluted nb of shares (m) 227.8 226.0 227.7 230.7 234.6 227.3 228.3 Statutory EPS 3.22 4.05 -2.36 3.81 4.01 3.36 3.44 Statutory Diluted EPS 3.16 3.99 -2.36 3.74 3.92 3.28 3.38 Headline EPS 3.70 4.45 4.54 4.44 4.58 4.14 4.17 Headline diluted EPS 3.64 4.39 4.46 4.36 4.48 4.04 4.09 Source: J.P. Morgan estimates, Company data.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Dentsu (Neutral)
Dentsu is Japan’s largest ad agency and ranks fifth in the world by consolidated gross profit. It started in 1901 as Japan Advertising. In 1907 it merged with Japan Telegraphic Communication, resulting in two businesses, communication and advertising. The company took its current name in 1955. The stock was listed on the first section of the Tokyo Stock Exchange in November 2001, the company’s 100th anniversary. Aegis was acquired in March 2013.
Dentsu Aegis Network holds many leading global network brands in the digital arena include iProspect (digital performance marketing agency), Isobar (digital agency), etc. The company acquired Merkle in August 2016. Merkle has more than 650 client companies (at the time of acquisition) and ranks 5th in the world for AdAge’s rankings of CRM and direct marketing networks in 2017. M1, Dentsu Aegis Network’s 100% people-based insights, planning, and activation platform, enables long-term transactions with clients, and we focus on its potential as a recurring service. We look for M1 to contribute to Dentsu Aegis Network’s new business acquisition as a result of bolstering its position in the increasingly important field of data marketing. The company has been investing to roll out M1 globally.
Separately, Dentsu is known for its strength in sports marketing. It entered the sporting-event business in the 1980s and currently possesses an overwhelming presence in Japan’s sports marketing segment that leverages sturdy, longstanding ties with sports associations in Japan and abroad. Dentsu exclusively handles sales of broadcasting rights to the Olympics, FIFA World Cup Soccer, the World Championships in Athletics, and other events hosted by the International Association of Athletics Federations (IAAF), and other events. The most important upcoming event for Dentsu is the Tokyo Olympics scheduled in 2020.
Work-style reform measures in Japan were completed up to 2018 (the company’s overall working hours have fallen by around 15%), and from FY2019 management plans to prioritize renewed strengthening of competitiveness and quality improvement. Progress is still required in the digital arena, and during 2018 Dentsu took a stake in the online ad agency Septeni Holdings, turning it into an equity- method affiliate (21% stake). CARTA HOLDINGS also became a consolidated subsidiary (Dentsu’s stake: 53%) after being established by merging the ad technology company Voyage Group with Dentsu’s group company Cyber Communications Inc. (CCI). Management hopes to make up lost ground by strengthening the digital resources at these companies.
Investment Thesis Work-style reform in Japan has been completed for now, but Dentsu needs to invest in order to regain its competitiveness and the margin improvement looked for by the market will not arrive in 2019. We also think the company is unlikely to outshine its many rivals in overseas business because few new accounts were picked up in 2018. Some bright signs are also appearing, such as strong growth in internet advertising in domestic business and expansion of work for P&G overseas, but we expect upward progress by the share price to remain difficult until top-line growth clearly recovers both in Japan and overseas.
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Outlook FY2019 guidance is for domestic gross profit to grow by about 6% YoY (excluding impact of Voyage consolidation; versus +2% YoY in FY2018) and overseas gross profit to grow by about 3% (versus +4.3% YoY in FY2018). We think guidance seems somewhat optimistic in light of the domestic weakness seen in October– December (−3% YoY) and lack of new overseas business wins in 2018. Also, we do not see any improvement in the underlying operating margin (FY2019 guidance 16.0% versus FY2018 16.4%) in both domestic business (20.3% versus 21.7%) and overseas business (13.0% versus 12.9%). Dentsu plans to prioritize investment to restore competitiveness, but its margin assumptions seem somewhat conservative, and we believe a top line shortfall can be offset to some extent by controlling costs.
Over the longer term, we expect domestic business in FY2020 to benefit from the Tokyo Olympics, but need to watch progress with initiatives to strengthen internet advertising (e.g., synergies with Septeni and Voyage Group) to achieve a longer-term recovery in competitiveness. In overseas business, Dentsu targets a recovery in the operating margin to 15% in 2021, but to achieve this goal, we believe it will need to restore and maintain organic growth that outpaces competitors. We still see uncertainty in terms of a structurally difficult business environment in APAC. Slow new business acquisition in 2018 is also a concern, but business with P&G has expanded since the start of 2019, and Dentsu says that about 80% of its pitches will be offensive proposals. We look for business acquisition to expand.
Valuation Our Dec-19 price target of ¥5,200 is based on DCF. We assume WACC of 5.9% (Market risk premium: 6.5%) and terminal growth rate of 0%. Our price target timeframe is through December 2019. Our price target equates to an EV/EBITDA of 9.0x and P/E of 15x based on our FY2019 adjusted EPS estimates, and an EV/EBITDA of 8.1x and P/E of 14x based on our FY2020 adjusted EPS estimates.
Risks to Rating and Price Target Upside Scenario
Faster-than-expected recovery in domestic business Greater-than-expected growth acceleration overseas Greater-than-expected improvement in profitability of domestic business Expansion of shareholder returns Downside Scenario
Greater-than-expected contraction of advertising budgets by big advertisers Greater-than-expected market share losses of domestic business Greater-than-expected slowdown in macroeconomics
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Figure 86: Gross Profits by Geography, 2018 Figure 87: Consol. Domestic Business’ Revenue by Segment, 2018
APAC 13% Others TV 28% 37% Japan EMEA 40% 23%
Marketing / Promotion 14% Internet Americas Creative 10% 24% 11% Source: Company reports. Source: Company reports.
Figure 88: Major subsidiaries Advertising Agencies Digital Agencies Media Agencies Technology Trading Desk Dentsu CCI DentsuX ISID Amnet Mcgarrybowen Isobar Dentsu Tec Carat iProspect Amplifi MKTG Vizeum Merkle Dentsu Digital Data2Decisions 360i Source: Company reports.
Figure 89: Key Management Figure 90: Key Clients (Non-consolidated) Executive Position Japan Overseas Toshihiro Yamamoto President & CEO Suntory General Motors Arinobu Soga Executive Officer & CFO P&G Microsoft Executive Officer & Counselor to the Toyota Motor AB InBev Yoshio Takada President Kirin P&G Executive Officer, Executive Chairman & Kao LVMH Tim Andree CEO of Dentsu Aegis Network KDDI Coca-cola Executive Officer, CFO of Dentsu Aegis Coca-Cola Toyota Nick Priday Network Honda Shiseido Source: Company reports. Softbank Intel Mizuho Source: J.P. Morgan estimates.
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Figure 91: Organic revenue growth, 2015-2018 Figure 92: Operating margin, 2014-21E 16% 30% IFRS OP Adj. OP Adj. OP (International) Adj. OP (domestic) Total Domestic Overseas 12% 25% 8% 20% 4% 15% 0% 10% -4% 5% -8% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 0% 2015 2016 2017 2018 2014 2015 2016 2017 2018 2019E 2020E 2021E Source: Company reports and J.P. Morgan Source: Company reports and J.P. Morgan estimates.
Figure 93: Acquisitions Figure 94: Balance sheet and cash flow position, 2018 ¥ in millions Net debt/ EBITDA 0.7x 2002 ¥1,218 FCF ¥101.4b 2003 2,317 Dividend ¥90 2004 55 Source: Company data, Bloomberg 2005 2,546 2006 2,591 2007 2,098 2008 15,797 2009 556 2010 14,737 2011 16,235 2012 29,491 2013 319,380 2014 35,528 2015 41,996 2016 170,419 2017 67,299 2018 50,804 Source: Company reports.
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Figure 95: Dentsu: Income Statement ¥million 17/12 18/12 18/12 19/12E 20/12E 19/12CoE 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY FY FY FY Revenue 226,281 210,820 218,850 272,890 242,107 239,547 243,514 293,344 1,018,512 1,062,300 1,140,000 1,097,900 Cost of goods sold 12,552 12,323 11,896 14,447 15,442 20,473 20,952 28,965 85,832 84,952 91,200 111,500 Gross profits 213,729 198,497 206,954 258,442 226,665 219,074 222,562 264,379 932,680 977,348 1,048,800 986,400 SG&A expense 175,980 193,323 175,289 207,365 204,166 200,934 203,644 171,321 779,451 818,648 871,500 829,000 Underlying Operating profit 37,749 24,221 31,665 70,311 32,744 28,118 28,648 63,719 153,229 158,700 177,300 157,400 Other profit and cost -9,162 -9,885 -12,014 42,788 -8,792 -9,978 -11,188 -10,074 -41,591 -35,000 -38,500 -34,900 Operating profits (IFRS) 32,119 13,188 18,467 73,618 22,393 18,140 17,460 53,645 111,638 123,700 138,800 122,500 Financial balance -4,358 5,806 2,183 4,417 -4,287 -15,674 6,329 -4,082 -17,714 -21,000 -21,000 - Income/loss from equity method 801 860 969 1,592 916 855 225 703 2,699 2,700 2,700 - investments Other - - - - 0 560 51,570 -2 52,128 0 0 Pretax profits 28,563 19,854 21,619 79,626 19,022 3,881 75,584 50,264 148,751 105,400 120,500 101,500 Taxes 9,741 5,623 6,584 14,572 6,781 2,208 26,756 15,505 51,250 35,500 39,800 34,200 Net profits 18,822 14,231 15,035 65,054 12,241 1,673 48,827 34,760 97,501 69,900 80,700 Non-controlling interests 877 1,463 1,234 4,089 1,453 1,675 1,413 2,644 7,185 6,000 6,000 Profit for the year attributable to the 17,943 12,769 13,801 60,965 10,788 -2 47,414 32,116 90,316 63,900 74,700 61,400 parent company EBITDA 46,135 27,440 33,298 87,200 37,022 32,866 32,314 69,204 171,406 179,700 199,300 - % YoY Sales ------7.0 13.6 11.3 7.5 9.7 4.3 7.3 7.8 Gross profits ------6.1 10.4 7.5 2.3 6.3 4.8 7.3 5.8 Underlying Operating profit (IFRS) ------13.3 16.1 -9.5 -9.4 -6.5 3.6 11.7 2.7 Operating profits 1.0 -50.9 -27.1 37.1 -30.3 37.5 -5.5 -27.1 -18.7 10.8 12.2 9.7 Pretax profits 0.5 -30.1 -13.8 56.0 -33.4 -80.5 249.6 -36.9 -0.6 -29.1 14.3 Net profits 4.2 -31.2 -8.9 87.2 -39.9 - 243.6 -47.3 -14.4 -29.2 16.9 -32.0 EBITDA 9.1 -26.6 -6.7 26.9 -19.8 31.2 -6.3 -21.7 -11.7 4.8 10.9 - % of sales Gross profits 94.5 94.2 94.6 94.7 93.6 91.5 91.4 90.1 91.6 92.0 92.0 89.8 SG&A expense 77.8 91.7 80.1 76.0 84.3 83.9 83.6 58.4 76.5 77.1 76.4 75.5 SG&A expense/Gross profits 82.3 97.4 84.7 80.2 90.1 91.7 91.5 64.8 83.6 83.8 83.1 84.0 Operating profits 14.2 6.3 8.4 27.0 9.2 7.6 7.2 18.3 11.0 11.6 12.2 11.2 Operating margin (adjusted) 17.7 12.2 15.3 27.2 14.4 12.8 12.9 24.1 16.4 16.2 16.9 16.0 Operating margin (IFRS) 15.0 6.6 8.9 28.5 9.9 8.3 7.8 20.3 12.0 12.7 13.2 12.4 Pretax profits 12.6 9.4 9.9 29.2 7.9 1.6 31.0 17.1 14.6 9.9 10.6 Net profits 7.9 6.1 6.3 22.3 4.5 -0.0 19.5 10.9 8.9 6.0 6.6 5.6 EBITDA 20.4 13.0 15.2 32.0 15.3 13.7 13.3 23.6 16.8 16.9 17.5 - Per share data EPS (¥) ------320.4 226.7 265.0 217.8 Fully diluted (¥) ------221.6 259.0 - DPS (¥) ------90.0 100.0 110.0 95.0 Dividend payout ratio (%) ------26.0 28.8 28.5 28.1 BPS (¥) ------3,940 4,088 4,265 - Source: Company data, J.P. Morgan estimates Note: Revenue, Gross profits, and Underlying Operating profit for FY17/12 are pro forma basis.
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Figure 96: Comparables $, ₤, and € in millions, except per share data LTM avg. EBITDA EPS EV/EBITDA P/E Company Ticker Rating Price Market Cap (m) Net Debt EV 2019E 2020E 2019E 2020E 2019E 2020E 2019E 2020E DIV Yield Interpublic Group IPG OW $21.53 $8,403 $1,900 $10,537 $1,495 $1,571 $1.87 $2.02 7.0x 6.7x 11.5x 10.7x 4.4% Omnicom OMC OW $75.16 $16,956 $2,485 $20,234 $2,384 $2,456 $5.87 $6.18 8.5x 8.2x 12.8x 12.2x 3.5% WPP WPP LN OW GBp 869.0 £10,965 £4,848 £15,524 £1,929 £1,759 GBp 95.0 GBp 92.0 8.0x 8.8x 9.1x 9.4x 7.0% Publicis PUB FP N € 46.53 € 10,946 -€ 366 € 10,068 € 1,365 € 1,396 € 4.04 € 4.09 7.4x 7.2x 11.5x 11.4x 4.0% Dentsu 4324 JT N ¥4,700 ¥1,355,527 ¥122,191 ¥1,478,103 ¥179,700 ¥199,300 ¥339.4 ¥376.9 8.2x 7.4x 13.8x 12.5x 2.0% Average 7.8x 7.7x 11.8x 11.2x 4.2%
S&P 500 2,892.7 17.4x 15.6x MSCI Europe 130.9 14.0x 12.8x Source: Company reports, Bloomberg, J.P. Morgan estimates. Note: Dentsu market cap in billions.
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Appendices
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Appendix I: Billings
An advertising account is always reported in terms of billings, not revenues. Billings represent the advertiser’s total advertising budget for that particular product. Historically, the industry standard was that 15% of this budget went to the agency that provided the creative work. The media buyer (the agency that negotiated the pricing and placement of the advertisement to the media) would be allocated approximately 4% of the budget for that job. The move to a fee-based compensation structure has made the translation from billings to agency revenues more complex, and pressure on fees has pushed down the revenue take on billings over the years.
A shorthand way of determining the annual revenue impact to an agency from a client’s budget is to take 10-12% of a budget for a creative account and 1-3% of the budget for media buying services. (As the price of media increased significantly in the 1990s, the agency’s creative fee moved to 12% from 15% of a typical budget.) This is an estimate, but it generally provides a good approximation of an agency’s fees. For example, we estimate that the agency that does the creative work for an account valued at $100 million would likely generate approximately $10-12 million in annual revenues from that advertiser. If it was a media account (the agency is simply responsible for the brokerage of the media business), it would be worth $2-3 million to the agency. If it was both a creative and a media account, it would be worth about $12-15 million. The rest of the dollars ($85-88 million in this example) goes to the medium itself (TV, radio, etc.).
Therefore, when a trade magazine writes about new business won or lost, the dollars being discussed are generally always referred to in terms of billings. The actual impact to an agency’s revenue line is typically only a fraction of the amount quoted.
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Appendix II: Working Capital Changes
Because advertising agencies serve as the pass-through vehicle for substantial sums of billings money, cash flows can fluctuate greatly. Specifically, an ad agency’s accounts receivable, expenditures billable to clients, prepaid expenses, and accounts payable balances shift from quarter to quarter (and even from week to week and day to day).
For this reason, we prefer to exclude working capital changes in our net free cash flow calculation as the quarterly shift in working capital does not necessarily provide a clear picture of an advertising and marketing services company’s ongoing cash position.
The following is a summary of the working capital changes quarter by quarter at Omnicom and Interpublic during the past couple of years, which exemplifies the positive-negative swings due to receivables and payables. Historically, Interpublic’s working capital swings were more dramatic, but as it has progressed through its turnaround, we believe it has done a very good job of improving its capital management.
Figure 97: Working Capital Changes at Omnicom and Interpublic, 2016-17 $ in millions Q1, 16 Q2, 16 Q3, 16 Q4, 16 Q1, 17 Q2, 17 Q3, 17 Q4, 17 OMC -807 -320 343 1,107 -551 -578 -199 1,676 IPG -690 -128 318 86 -439 24 -198 625
Source: J.P .Morgan estimates, company reports
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Appendix III: Glossary
Account Consolidation Concentration of advertising budgets at fewer agencies by advertisers. Companies have trended in recent years toward using fewer agencies for advertising of their different product lines in an attempt to improve brand cohesion, achieve integration of advertising and marketing service efforts, and gain greater pricing concessions over agencies.
Acquisition Growth Growth through revenues of acquired companies. As advertising and marketing services companies typically acquire smaller companies on a regular basis, acquisition growth is an important component of overall growth.
Advertising and Marketing Services Company Holding company that includes one or more advertising agencies and an assortment of marketing services companies. The largest advertising and marketing services companies serve as parents to as many as 1,500 separate businesses.
Average Frequency In TV and radio ratings, the average number of times the target is exposed to the message.
Billings An advertiser’s total advertising budget, which is handled by its advertising agency. Advertisers allot a total dollar amount to advertise their product, and advertising agencies serve as the pass-through vehicle for these dollars, taking a share of the billings as agreed with the advertiser and passing the rest on to the media on which the ad is placed. For creative work, agencies typically take approximately 12% of the total billings as a fee or commission. For media buying work, agencies typically take approximately 4% of total billings. Billings is often used as a measurement of an advertising agency’s size.
Client Conflict Many advertisers have historically maintained client conflict policies that preclude them from working with an ad agency that also manages the advertising of a competing product. One of the goals of the holding company structure is to provide more than one advertising agency such that competing product accounts can be housed at different agencies within the holding company.
Consumer Packaged Goods (CPG) Manufactured consumer products, including food and personal care products. Referred to as fast-moving consumer goods (FMCG) in Europe.
Cost-Plus Compensation Fee-based compensation system whereby clients pay advertising agencies the total costs involved in their work plus a profit margin agreed upon during contract negotiations. As opposed to commission-based compensation, cost-plus
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compensation tends to be recognized earlier in the work process, when the service is rendered, whereas commission-based compensation is recognized when the advertising appears on a specific medium, which is after the agency makes sizable expenditures.
CPM Short for cost per thousand (“M” being 1,000 in Roman numerals), the cost per 1,000 viewings of an advertisement. CPM = (Media Cost/Impressions) x 1,000. Used as a standard across advertising media.
Creative Advertising The conception and production of advertisements.
Customer Relationship Management (CRM) Broadly speaking, marketing services that help an enterprise create, develop, manage, and enhance a customer relationship. Service offerings include direct marketing, market research, and promotional marketing.
Direct Marketing Direct communication with a targeted population segment or a specific customer. Direct marketing involves maintenance of customer databases and the sending of direct mail or e-mail to targeted population segments (such as a certain age group, geographic location, or ethnicity) or to previous customers, as well as telemarketing and response analysis.
Direct-to-Consumer (DTC) The marketing of pharmaceuticals directly to the end user rather than through trade marketing to health care professionals.
Display Advertising Also known as banner ads, these are graphics placed on websites in prescribed sizes, just as a print ad appears in a newspaper.
Earnouts Common form of paying for a business acquisition, in which the agency pays a portion of the purchase price (often 50%) on the day of the acquisition, with an agreement to pay the remainder of the purchase price over several years (often five years), contingent on the acquired company meeting certain performance objectives.
Entertainment Marketing Advertising and marketing of personalities in film, music, and other fields of entertainment and use of such fields of entertainment as a medium for advertising. Entertainment marketing includes music licensing, movie product placements, and sponsorships of products by famous personalities.
Health Care Marketing Targeted marketing by pharmaceutical companies and health care providers to the medical community as well as to consumers. Service offerings include medical
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detailing (describing the specifics of new drugs to doctors and pharmacists), educational services, direct mail programs, and managed care consultancy.
Interactive Incentive-Based Compensation Advertising/Marketing A hybrid of commission and fee-based compensation whereby clients pay their advertising agencies an agreed-upon fee plus commissions if the advertisements created improve the client’s product’s performance.
Development of advertising through interactive media, primarily the Internet, and marketing through e-mail. Interactive marketing is often offered in conjunction with other advertising and direct marketing services and includes consulting and strategic planning work in this medium. Also referred to generally as online advertising/marketing.
Marketing Services As opposed to traditional media advertising, other forms of marketing that include direct mail, market research, promotions, public relations, and specialized forms such as health care, multicultural, entertainment, and sports and event marketing.
Market Research Collection and analysis of data in order to determine factors that influence customers’ purchasing patterns. Market research involves surveys and interviews from population samples, combined with an understanding of population demographics and historical consumption of products and services. Market research can further include projections of consumer purchasing behavior based on these findings.
Media Buying Purchasing of advertisement space in the various media (TV, radio, print, etc.). Media buying involves negotiations between specialized media buyers and the media outlets.
Research and evaluation of advertising placement strategies as a preliminary step in Media Planning developing creative advertising.
Net New Business New business won from existing or new clients, netted against business losses from existing clients.
Organic Growth Growth from existing clients within the advertising agency and from new business wins as opposed to growth through acquisitions. There are certain variations in the definition of organic growth—Omnicom, for instance, includes in its organic growth a calculation of incremental revenue from newly acquired companies while under Omnicom’s ownership. Most other advertising and marketing services companies only claim organic growth from businesses that they have acquired and recorded on their books for one full fiscal year.
Promotional Marketing Incentives offered to potential customers that heighten consumers’ awareness and encourage the purchase of a product, including price discounts, free samples, and in- store advertising of products as well as trade promotions to groups such as wholesalers and retailers.
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Public Relations (PR) Communication of a company’s or organization’s message or image to the public.
Reach In TV and radio ratings, the percentage of the target exposed to the message at least once. The number of different homes/people exposed to at least one program or commercial across a stated period of time. All homes are counted only once; maximum reach therefore is 100% of TV or radio households or audience.
Remnant Broadcast advertising space that is not sold in the upfront or scatter markets. It often consists of inventory at odd hours and is sold in periods as short as a week in advance.
Scatter Also known as spot sales, consisting of broadcast advertising space sold in the short term (typically a few weeks to a few months in advance) and usually at higher rates than in the fixed-rate upfront market.
Specialty/Other Communications General grouping within marketing services of focused marketing efforts targeting specific industries, demographic groups, or media. Some of the work involves traditional advertising, but in a specialized industry or targeted to a specific demographic group. General subgroups include health care, multicultural, interactive, entertainment, and sports and event marketing.
Sports and Event Marketing Use of sports personalities in advertising and marketing as well as the placement of advertising at sporting events. Event marketing also includes the planning and execution of events such as corporate functions, conferences, and sporting events.
TV Rating Percentage of persons or homes that have access to a TV that are tuned to a particular program. One rating point equals 1% of the total potential household or demographic audience. Therefore, the rating is the percentage of a population viewing a TV program during the average minute.
Upfront Selling of advertising space on network TV prior to the 12-month network season that begins in September. Advertising space is sold at fixed rates in advance, and advertisers have a schedule of options to cancel their commitments. The upfront market takes place from May to July, and networks typically sell about 75% of their ad space during this period.
VOD Video on Demand—an interactive system through which users can stream or download individual video programs from a provider such as a broadcast or cable network, often priced per program. VOD enables more personal consumption of media and can be advertising free.
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Companies Discussed in This Report (all prices in this report as of market close on 08 April 2019, unless otherwise indicated) Dentsu (4324) (4324.T/¥4660/Neutral), Interpublic Group of Companies (IPG/$21.53[05 April 2019]/Overweight), Omnicom Group (OMC/$75.16[05 April 2019]/Overweight), Publicis Groupe (PUBP.PA/€45.83/Neutral), WPP PLC (WPP.L/853p/Overweight) Analyst Certification: All authors named within this report are research analysts unless otherwise specified.The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea- based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan is a market maker and/or liquidity provider in the financial instruments of/related to WPP PLC, Omnicom Group, Interpublic Group of Companies, Publicis Groupe, Dentsu (4324). Manager or Co-manager: J.P. Morgan acted as manager or co-manager in a public offering of securities or financial instruments (as such term is defined in Directive 2014/65/EU) for Interpublic Group of Companies within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: WPP PLC, Omnicom Group, Interpublic Group of Companies, Publicis Groupe, Dentsu (4324). Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment banking clients: WPP PLC, Omnicom Group, Interpublic Group of Companies, Dentsu (4324). Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the services provided were non-investment-banking, securities-related: WPP PLC, Omnicom Group, Interpublic Group of Companies, Publicis Groupe, Dentsu (4324). Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the services provided were non-securities-related: WPP PLC, Omnicom Group, Interpublic Group of Companies, Publicis Groupe, Dentsu (4324). Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services from WPP PLC, Omnicom Group, Interpublic Group of Companies, Dentsu (4324). Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from WPP PLC, Omnicom Group, Interpublic Group of Companies, Dentsu (4324). Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from WPP PLC, Omnicom Group, Interpublic Group of Companies, Publicis Groupe, Dentsu (4324). Debt Position: J.P. Morgan may hold a position in the debt securities of WPP PLC, Omnicom Group, Interpublic Group of Companies, Publicis Groupe, Dentsu (4324), if any. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477- 0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477- 0406 or e-mail [email protected].
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
WPP PLC (WPP.L, WPP LN) Price Chart Date Rating Share Price Price Target (p) (p) 29-Apr-16 OW 1628 1880 2,940 OW 1,935p OW 2,032p OW 1,969p OW 1,750pOW 1,620p 27-Jun-16 OW 1525 1930 18-Jul-16 OW 1666 1935 2,520 OW 1,930p OW 2,075pOW 1,997p OW 1,697p OW 1,747p OW 1,090p 24-Aug-16 OW 1747 1975
2,100 OW 1,880pOW 1,975p OW 2,102p OW 1,900p OW 1,758p OW 1,070p 04-Nov-16 OW 1707 2075 29-Nov-16 OW 1706 2032 Price(p) 1,680 13-Jan-17 OW 1868 2102 06-Mar-17 OW 1759 1997 1,260 19-Apr-17 OW 1702 1969
840 18-Jul-17 OW 1552 1900 01-Sep-17 OW 1420 1697 420 20-Nov-17 OW 1267 1750 06-Dec-17 OW 1311 1758 0 08-Jan-18 OW 1340 1747 Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 16 16 16 17 17 17 17 18 18 18 18 19 19 01-Mar-18 OW 1394 1620 06-Nov-18 OW 894 1070 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 29, 2002. All share prices are as of market close on the previous business day. 10-Dec-18 OW 816 1090
Omnicom Group (OMC, OMC US) Price Chart
136 OW $86
119 OW $81
102 Date Rating Share Price Price Target OW $90 OW $92 OW $90 OW $88 ($) ($) 85 19-Apr-16 OW 85.25 90.00 Price($) 68 07-Oct-16 OW 83.06 92.00 18-Apr-17 OW 86.17 90.00 51 17-Jul-18 OW 78.10 88.00 34 11-Oct-18 OW 69.57 81.00 13-Dec-18 OW 77.59 86.00 17
0 Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 16 16 16 17 17 17 17 18 18 18 18 19 19
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 29, 2002. All share prices are as of market close on the previous business day.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Interpublic Group of Companies (IPG, IPG US) Price Chart
42
35
28 OW $27 OW $28 OW $27 NR OW $28 Date Rating Share Price Price Target ($) ($) Price($) 22-Apr-16 OW 23.43 27.00 21 07-Oct-16 OW 22.21 28.00 24-Oct-17 OW 20.63 27.00 14 02-Jul-18 NR 23.44 -- 11-Oct-18 OW 21.94 28.00 7
0 Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 16 16 16 17 17 17 17 18 18 18 18 19 19
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 29, 2002. All share prices are as of market close on the previous business day.
Date Rating Share Price Price Target (€) (€) 14-Apr-16 OW 63.06 72.00 08-Jun-16 OW 61.65 76.00 Publicis Groupe (PUBP.PA, PUB FP) Price Chart 27-Jun-16 OW 60.66 75.00 18-Jul-16 OW 63.49 76.00 25-Jul-16 OW 65.26 79.00 OW €75 OW €78 OW €78 OW €79OW €81.3 OW €79.6 OW €75.9N €56 105 28-Oct-16 OW 61.51 78.00 13-Jan-17 OW 64.39 81.00 90 OW €76OW €79 OW €79OW €83 OW €73 OW €77.4OW €78.3 OW €82.1OW €64 06-Feb-17 OW 62.59 79.00 09-Feb-17 OW 63.08 78.00 75 OW €72OW €76 OW €81OW €82 OW €74OW €79.9OW €78.9 OW €82.3OW €68 28-Feb-17 OW 63.22 82.00 19-Apr-17 OW 63.62 83.00 Price(€) 60 06-Oct-17 OW 60.25 74.00 45 24-Oct-17 OW 57.40 73.00 29-Nov-17 OW 55.49 79.00 30 08-Jan-18 OW 55.60 79.90 02-Feb-18 OW 56.00 77.40 15 08-Feb-18 OW 55.74 81.30 0 28-Feb-18 OW 61.26 78.90 Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 23-Apr-18 OW 59.40 78.30 16 16 16 17 17 17 17 18 18 18 18 19 19 19-Jul-18 OW 58.30 79.60 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. 08-Oct-18 OW 53.14 82.30 Initiated coverage Sep 06, 2002. All share prices are as of market close on the previous business day. 18-Oct-18 OW 52.24 82.10 27-Nov-18 OW 52.46 75.90 10-Dec-18 OW 48.45 68.00 09-Jan-19 OW 51.62 64.00 07-Feb-19 N 55.00 56.00
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
Dentsu (4324) (4324.T, 4324 JT) Price Chart
10,820
9,738
8,656 N Y5,200 7,574 OW Y5,900 NR OW Y5,500 OW Y5,800 N Y5,400 Date Rating Share Price Price Target 6,492 (Y) (Y) 27-Jun-16 OW 4725 5900 Price(Y) 5,410 15-Dec-16 NR 5510 -- 4,328 06-Sep-17 OW 4505 5500 3,246 16-Jan-18 OW 4900 5800 08-Feb-19 N 5030 5400 2,164 08-Apr-19 N 4700 5200 1,082
0 Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 16 16 16 17 17 17 17 18 18 18 18 19 19
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Apr 22, 2002. All share prices are as of market close on the previous business day.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. Coverage Universe: Quadrani, Alexia S: AMC Networks (AMCX), Activision Blizzard (ATVI), CBS Corporation (CBS), Cinemark (CNK), Discovery Inc - A (DISCA), Disney (DIS), Electronic Arts (EA), FOX (FOXA), Gannett Company (GCI), IMAX (IMAX), Interpublic Group of Companies (IPG), LSC Communications (LKSD), Lamar Advertising Co. (LAMR), Lionsgate Entertainment (LGFa), MSG Networks (MSGN), National CineMedia, Inc. (NCMI), New York Times Company (NYT), News Corp (NWSA), Omnicom Group (OMC), Outfront Media Inc (OUT), SeaWorld Entertainment (SEAS), Sinclair Broadcast Group (SBGI), TEGNA (TGNA), Viacom (VIAB) Kerven, Daniel R: Atresmedia (A3M.MC), ITV (ITV.L), M6 (MMTP.PA), Mediaset (MS.MI), Mediaset España (TL5.MC), Pearson (PSON.L), ProSiebenSat.1 (PSMGn.DE), RELX PLC (REL.L) (REL.L), RTL (AUDKt.BR), TF1 (TFFP.PA), Ubisoft (UBIP.PA), Vivendi (VIV.PA), WPP PLC (WPP.L), Wolters Kluwer (WLSNc.AS) Mori, Haruka: ASKUL (2678) (2678.T), Akatsuki (3932) (3932.T), BANDAI NAMCO Holdings (7832) (7832.T), CAPCOM (9697) (9697.T), CyberAgent (4751) (4751.T), DeNA (2432) (2432.T), Dentsu (4324) (4324.T), Gree (3632) (3632.T), Gurunavi (2440) (2440.T), Hakuhodo DY Holdings (2433) (2433.T), KONAMI HOLDINGS (9766) (9766.T), Kakaku.com (2371) (2371.T), LINE (3938) (3938.T), Mercari (4385) (4385.T), Nexon (3659) (3659.T), Nintendo (7974) (7974.T), Oriental Land (4661) (4661.T), Rakuten (4755) (4755.T), Recruit Holdings (6098) (6098.T), SQUARE ENIX HOLDINGS (9684) (9684.T), Sega Sammy Holdings (6460) (6460.T), Yahoo Japan (4689) (4689.T)
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
J.P. Morgan Equity Research Ratings Distribution, as of April 06, 2019 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 44% 41% 14% IB clients* 53% 47% 37% JPMS Equity Research Coverage 42% 44% 14% IB clients* 74% 64% 56% *Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12 months. For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. This information is current as of the end of the most recent calendar quarter.
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
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{[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected]
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112 Completed 08 Apr 2019 01:44 PM EDT Disseminated 08 Apr 2019 11:00 PM EDT This document is being provided for the exclusive use of [email protected] & clients of J.P. Morgan.
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