WPPGY's 3Q10 Trading Update - Analyst Blog

Ireland-based advertising titan WPP Group plc. (WPPGY) on October 29, released its trading update for the third quarter of 2010. The company reported its top-line year-over -year growth of 12.2% to £2,253.0 million (US$3,494.3 million). Results were above the Zacks Consensus Estimate of US$3,470 million.

Revenue growth was attributable to strength across all geographical regions and communication services sector. On a constant currency basis, profits grew by approximately 8.1%. Excluding the impact of acquisitions and currency fluctuations, revenue was up 7.5% in the reported period.

From a geographical perspective, WPP Group experienced a noticeable growth in Asia Pacific, Latin America, Africa, the Middle East and Central & Eastern Europe; where revenue which grew by 18.1% year over year, was followed by a 16.3% growth from the North American operations. Sales in the United Kingdom soared 7.4% while Western Continental Europe registered a 2.6% growth.

Of the four business segments, revenue from Advertising & Media Investment Management segment increased 14.0% year over year to £890.6 million (US$1,381.3 million) and accounted for 39.5% of the quarter's total revenue. Consumer Insight revenue (25.8% of total revenue) of £581.9 million (US$902.3 million) grew by 9.9%.

Branding & Identity, Healthcare and Specialist Communications (25.4% of total revenue) revenue was £572.8 million (US$888.5 million), up 12.8% year over year while revenue from Public Relations & Public Affairs grew 9.9% to £207.7 million (US$322.2 million).

Net new business billings won during the quarter was £880 million (US$1.409 billion) attributable to incremental business from existing and new clients and consolidation in the industry.

As on September 30, net debt was £2.954 billion (US$4.667 billion), down from £3.392 billion in the comparable period of 2009. The company repurchased approximately 4.5 million shares at a cost of £28.6 million and an average price of £6.42 per share in the first nine months of 2010.

Outlook: Based on the results in the first nine months of 2010, management anticipates that its full year margin would exceed the company's margin target of 1.0%.

Over the long term, WPP Group targets to improve operating income by 10% – 15%; operating margin by 0.5% – 1% annually; improving the percentage of staff costs to revenue or gross margins by 0.6% annually; converting 25% – 33% of incremental revenue to profit and increasing revenue ahead of industry averages.

We currently maintain an Outperform recommendation on the company.