• by Larissa Faw , July 19, 2018

Publicis Groupe’s stock price took a pounding on the Paris Exchange Thursday after the holding company issued a weak second quarter earnings report including a 2.1% organic revenue decline.

The stock was down more than 8.5% in mid-afternoon trading to €53.30. Publicis was the second holding company this week to face the wrath of the markets after turning in disappointing Q2 results. On Tuesday Omnicom’s stock price fell more than 9% after its earnings report fell below Wall Street’s expectations.

Publicis Groupe cited implementation efforts to comply with new privacy regulations known as GDPR as contributing to its tepid performance in the period.

Those efforts, the Groupe said during an earnings conference call early Thursday caused several ad campaigns to be suspended. Account losses were also cited.

Arthur Sadoun, CEO/Chairman, Publicis Groupe, also noted the impact of the low U.S. dollar and other currencies versus the euro. And he said the lack of growth should be seen in the context of a difficult comparable period as growth in the first half of 2017 was 4.3%.

Also contributing to the slowdown: the "volatile health sales representatives business in the U.S.," said Sadoun, adding the health business is split into two separate divisions: the stronger communications side and the weaker sales services operation. The latter "represents the biggest share of our negative growth as the overall impact of our Publicis Health business was around 30 million euro," says Sadoun, which at times during the investor call, implied that the Groupe may divest in this "low margin business." 

Net revenue during the quarter was $2.55 billion (€2.198 billion), down 8.3% from 2017. Net revenue for the first half of the year reached $4.97 billion (€4.280 euro), down 8.2% from the year-ago period.

The organic revenue decline for the first half was 0.4%. 

"Overall, our first half financial results, combined with our impressive new business wins that will start ramping up in the second half, make us confident to deliver our full year objective of improving growth and margin versus 2017," said Sadoun. 

North America posted organic growth of 0.1% for the first half of the year. The region was helped by accounts won in 2017 (including McDonald’s, Diesel, Lionsgate, Molson Coors and Southwest). "This is an encouraging sign as this is where our new model is the most advanced," says Sadoun. 

Asia Pacific net revenue fell 15.2 % with organic revenue down 3.3%. This negative performance is largely attributable to Australia which has been impacted by the discontinuation of a Qantas call center contract. The Middle East & Africa posted organic growth of 4.6% driven by South Africa (+11.1%) and the United Arab Emirates (+6.2%). Latin America reported organic growth of +9.1%.

Although some companies are taking creative capabilities in-house, Publicis Media CEO Steve King said the media side is experiencing the reverse effect as advertisers realize taking media in-house is a difficult process to implement. King responded to an investor question that the Groupe passed on bidding for Acxiom's data-marketing division which IPG purchased for $2.3 billion earlier this month. He says Publicis is more focused on helping its clients build first-party data platforms rather than seeking opportunities to gain access to additional consumer data.

Commenting on changes at SapientRazorfish Sadoun said company's broader transformation is making a specific technology unit less relevant when clients seek this embedded expertise across all categories. That said, Sadoun added it will take time figure the brand's future. However, Sadoun emphasizes, "There is a lot of reason to keep the SapientRazorfish brand."

Looking forward, the Groupe's objective is to accelerate organic growth over the next two years to reach +4% by 2020. “This Q2 bump does not change our forecast for the year,” says Sadoun.

Pivotal research senior analyst Brian Wieser called the Groupe’s performance “a surprising result that was far below consensus and our own expectations.”

In an investor note Wieser added, “While we see plenty of reasons for concern in the organic revenue trends and because of observations we have on the industry regarding insourcing and reduced use of creative agencies with AOR-based relationships, we see reasons for optimism, too. Publicis points to growth associated with their “strategic game-changers” and new business trends. We also think that marketers who have insourced activities will eventually return most of those functions to agencies (albeit at lower margins, likely), while agencies themselves remain highly capable of finding new ways to generate new revenue streams. Towards these ends, our expectations for the company are consistent with guidance.”

Wieser continues to rate Publicis Groupe stock a “hold.”