While the advertising world endures a busy summer, sweating out more than a few top-level executive changes, large account reviews such as the frenzy over Bank of America's (NYSE:BAC) sizeable business, and a debate over whether "real" (i.e., not size 0) models can effectively sell products, top agencies such as PublicisGroupe SA (NYSE:PUB) and Omnicom Group (NYSE:OMC)have already reported accelerating revenue growth.
Today, bellwether London-based advertising agency WPP Group (NASDAQ:WPPGY) announced its own impressive first-half results, posting a 45% rise in net profits.
Reporting its results in accordance with International Financial Reporting Standards, WPP benefited from its purchase of Grey Global and raked in a 22% increase in revenue from the year-earlier quarter. Excluding acquisitions and currency fluctuations, organic revenues rose 6%.
The world's second-largest advertising agency, whose businesses include Ogilvy & Mather Worldwide and Young and Rubicam, also raised its operating margin growth goals from 13.2% to 13.7% in 2005, targeting 14.2% in 2006 and 14.7% in 2007. Guidance for organic growth was not provided.
This guidance indicates a healthy turn for the advertising industry, as predicted in WPP's 2004 annual report, which forecast a healthy recovery over the next several years following the industry's slowdown in the 2000 Internet bust. In the current earnings release, management cited new business activity and healthy corporate profits as reasons for its advance, with all global regions showing double-digit revenue growth on a constant currency basis.
Despite slow growth in traditional media, more rapid growth is seen in new media, such as direct, Internet, and interactive marketing, as well as satellite radio. Overall, management expects the industry to grow between 2% and 3% this year, with WPP outpacing its rivals.
Last year, WPP Advisory Board member Jeremy Bullmore asked in the company's report, "Why is a good insight like a refrigerator?" He answered, "Because the moment you look into it, a light comes on."
Well, WPP's first-half numbers provide good insight into an industry benefiting from favorable trends and a company performing well and increasing market share. However, remember that a light is also shining on an industry characterized by intense competition, with low barriers to entry and low switching costs.
In particular, the tenure for advertising clients lately seems to be decreasing while the revolving door for creative and executive talent turns increasingly quickly. While I applaud WPP's results, don't be surprised if some of these dynamics affect the company's bottom line as the industry recovers from its past doldrums.
Fool contributor S.J. Caplan welcomes comments. She does not own shares of any of the companies mentioned in this article.
