POG Distractions, International Volatility Cited As Drags On Publicis Groupe's Q2 Results

A new government in India; upcoming Presidential elections in Brazil; Russia's takeover of Ukraine, and the escalating Middle East. International uncertainty is to blame for Publicis Groupe reporting second-quarter 2014 performance well below that of the first quarter, according to the company.

The Group’s reported consolidated revenue for Q2 2014 was 1,761 million euro (about $2.4 billion at today’s exchange rate), down 1.5% from Q2 2013, partly due to the impact of the strong euro. Organic growth of just 0.5% was due to unfavorable comparables (+5.0% in Q2 2013), but also to the persistent weakness of certain markets and investments on the part of a number of clients who substantially downsized their budgets.

By geography, North America reported 1,637 million euro ($2.2 billion) for the first six months of 2014, up 0.4% year-over-year. Europe, excluding Russia and Turkey, reported revenue of 1,005 million euro ($1.4 billion), up 3.6%. Emerging markets, including Brazil, India, and Chin, reported $556 million euro, down 5.1%.

"These figures are not satisfactory by our standards," says Publicis CEO Maurice Levy. "They are not consistent with what our operations can achieve. As can be seen from our digital growth (+8.8%) or the numerous awards from various juries, our strategy is spot-on and our networks are at the cutting edge of the industry."

Weakness was also greater than expected due to the cancellation or postponement of campaigns. Blackberry, for instance, switched from advertising to consumers to business-to-business evaporating "90% of their ad spend," says Levy. Plus, whereas Publicis used to handle all Motorola business, now new parent company Lenovo has put the account is in review. 

Meanwhile, the recent attempted Fox-Time Warner merger underscores Levy's belief that the Omnicom-Publicis merger was necessary to succeed in today's globalized market. "I see trends before anyone else," he says. "The thirst for content is hard to satisfy with their current size. Expect to see consolidation in order to scale." 

At the same time, he admits that merger talks with Omnicom may have contributed to Publicis' current struggles. "It took my attention and the time of many people that we should have been spending on day-to-day business," he says.

Looking forward, Levy says the holding company prefers to be extremely cautious on growth prospects and plans to prioritize cost control in order to achieve a margin closer to its goal for the full year. To that end, acquisitions are being evaluated for their long-term potential rather than short-term benefits. Publicis has spent only 61 million euros ($82 million) on acquisitions in the first six months of 2104, compared to 363 million euros ($490 million) spent in the same time frame last year.

"Don't expect us to buy just for the sake of inflating our numbers," says Levy. "We recently turned down an acquisition under the probability that we wouldn't be paid back for a really long time. And there are no large acquisitions of size planned. We continue to look at acquisitions in digital and operations to help lead our business."

Now, Publicis is revising the 2018 objectives it stated in April 2013. Back then, the company expected 75% of its revenue to come from digital (50%), emerging markets (35%), and overlap (20%). Instead, a new "Bottom Up Process" has asked each division CEO to revisit their plans to take into account market and industry changes. "Contrary to media reports, this isn't strategic guidance. But there has been a digital transformation that we can't ignore," says Levy. Executives will submit their plans at the beginning of September, with Levy presenting these new goals publicly in the first half of October. 

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