Concerted efforts to shift the dial
Dentsu’s mid-term targets for FY21–24 for organic revenue growth of 4–5% CAGR, an operating margin of 17.0–18.0% in FY23 and 18.0% in FY24 will obviously not now be met, although this has been apparent for some time. This is due to a combination of internal and external factors, and the new mid-term growth plan currently being worked on should address the core issues, which we view as the need to strengthen the core business offering, simplify the organisation and invest in data and technology. The focus of the plan is on improving the returns to shareholders, through driving growth and cash conversion.
The One dentsu initiative is central to driving improved revenue and margin performance and has resonance with realignments taking place across the peer set. The need for systems and data to be readily available to structure and inform projects should mean greater coherence in the offering, giving more holistic solutions to client business challenges, rather than each agency approaching separately with their own skill sets on offer (‘Integrated Growth Solutions’ in Dentsu’s vernacular). Pooled specialist resources can deliver more efficiently with better utilisation rates. This is taken further by the identification of accelerator clients, of which there are currently 11 with multinational footprints, each with account leads working closely with the client. 30 further regionally strategic clients have been identified, which will benefit from the One dentsu approach and may become accelerator clients over time.
The scale of the global operations can make it difficult to adjust quickly, with the poor economic backdrop accentuating the weak points. Addressing the problems in the Asia-Pacific region is clearly a short-term priority and the impairment loss of ¥53.1bn (of which goodwill represents 95%) acknowledges this.
Exhibit 1: Summary of revisions to forecasts
|
Net revenue (¥bn) |
Adjusted operating profit (¥bn) |
EPS (¥) |
|
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
2023 |
1,122.3 |
1,129.5 |
+1 |
151.5 |
163.5 |
+8 |
335 |
340 |
+1 |
2024e |
1,172.6 |
1,189.3 |
+1 |
180.7 |
180.0 |
u/c |
436 |
382 |
-13 |
2025e |
1,213.6 |
1,227.0 |
+1 |
199.3 |
196.0 |
-2 |
650 |
406 |
-38 |
Source: Dentsu accounts, Edison Investment Research. Note: 2023 ‘Old’ = prior estimates.
Our revised forecasts for the current year are set to match the current company guidance, which we regard as sensible. Given the commentary around the FY23 figures and outlook, the likelihood is that the results will be weighted to H2.
We have made modest consequent adjustments to our FY25 figures and acknowledge the obvious gremlin that had slipped through on the EPS figure. 6% year-on-year progress looks more reasonable, helped by the continuation of the share buyback programme.
Exhibit 2: Long-term regional net revenue and operating margin performance
|
|
Source: Denstu accounts, Edison Investment Research
|
We may be overly cautious on the timing of the likely improvement in adjusted operating margin, given that the earlier ambition was for 18.0%, but the outlook here should be clearer once details of the next mid-term plan are disseminated.
Japan delivers best regional performance
Japan (40% FY23 net revenue): Q4 organic net revenue growth 0.9%, FY23 organic growth 1.6%.
The group’s Japanese business is demonstrating the benefits of the concentration on Customer Transformation & Technology (CT&T), now 30.8% of regional revenues, up from 28.2% in FY22. The ability to bring creative expertise into the consultancy offering is opening additional opportunities and driving growth, despite the relative weakness of the TV advertising market. The stronger-than-expected operating margin performance (FY23: 23.0%) partly reflects this business mix and partly the delay from November until February 2024 of an IT upgrade project.
The FY24 outlook for the Japanese business is described as ‘robust’.
Americas (28.7% FY23 net revenue): Q4 organic net revenue decline -9.3%, FY23 organic decline -7.2%.
FY23 performance was affected by the well-documented reduction in spend by major tech and finance clients on both marketing and transformation projects, so affecting revenues in both Media and CT&T. Creative actually posted a small positive organic growth rate of 1% for the year. Dentsu also suffered some client losses, the impact of which will extend into H124. The roll-out of One dentsu is clearly having a positive impact, with higher win conversion rates and better client retention.
Management reports some resumption of spend by tech clients in Q423, which has extended into Q124, giving hope for better full-year prospects. Lead times remain slow but the pipeline is good, and, encouragingly, is 90% offensive, whereas this time last year the figure was 60%.
EMEA (21.2% FY23 net revenue): Q4 organic net revenue decline -13.6%, FY23 organic decline 10.9%.
There were a number of factors behind the poor performance in the EMEA region. Firstly, there was a pattern of reduced media spending in technology and finance, measured against strong prior year comparators. Secondly, as in the Americas, CT&T declined after client losses in H123 with slower pipeline conversion and reduced project scope from several clients. Patterns by country across the region were mixed, with positive organic growth in Spain and Italy, and generally better local performance than that from global accounts.
The issue on a highly complex set of interwoven projects in business transformation and systems integration across the DACH region that was identified late in Q223 carried across into Q323 as more remedial work was done. No further adjustments were needed in Q423. This issue alone is estimated by management to have cost a 100bp reduction in the group FY23 operating margin.
New regional management is now in place, tasked with rolling out the integrated growth solutions approach, backed by the One dentsu initiative.
Asia-Pacific (excluding Japan) (10.1% FY23 net revenue): Q4 organic net revenue decline 8.6%, FY23 organic decline -8.2%.
The Asia-Pacific region experienced challenging macroeconomic conditions in many of the individual territories. This played out in lower Media revenues across the region as clients pulled back spend, with Creative organic revenues declining on weakness in China, although South Korea and Hong Kong largely bucked the trend. India also suffered from Media client losses in Q223 and reduced project spend, particularly in CT&T.
The plan for driving growth and recovery in the region focuses on:
■
rebuilding the core businesses in China, Australia and New Zealand, and India, with roll-out of best practice from across the region and the wider group;
■
strengthening delivery of integrated growth solutions to accelerator clients, plus focus on Japanese clients operating in the wider Asia-Pacific region; and
■
reviewing the regional cost structure.
