WPP

WPP Plc: 2007 Annual Report (Form 20-F) Summary

Business Context and Reporting Period

Company: WPP Plc (WPP Group plc)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: WPP is a leading global communications services organization operating in 106 countries with approximately 90,000 employees. The Group is organized into four primary segments: Advertising and Media Investment Management; Information, Insight and Consultancy; Public Relations and Public Affairs; and Branding and Identity, Healthcare and Specialist Communications.
Accounting Standards: International Financial Reporting Standards (IFRS).

Key Financial Metrics (2007)

Note: Revenue growth on a like-for-like basis was 5.0%, and on a constant currency basis was 8.2%.

Material Changes vs. Prior Period

• Revenue Growth: Reported revenue increased 4.7% to £6.2 billion. Growth was driven by acquisitions (£132.2 million contribution) and organic growth, particularly in Asia Pacific, Latin America, Africa, and the Middle East (+11.7% reported growth).
• Profitability: Operating margins improved from 12.6% to 13.0%. Headline PBIT margin (excluding goodwill impairment and other non-recurring items) reached a record 15.0%.
• Acquisitions: Significant acquisition of 24/7 Real Media Inc. (TFSM) in July 2007 for approximately £316.5 million cash, strengthening digital marketing capabilities. Total cash spent on acquisitions and investments was £744.4 million.
• Impairments: Goodwill impairment charges of £44.1 million were recorded in 2007 (compared to £35.5 million in 2006) related to underperforming businesses in specific markets.
• Debt: Net debt increased to £1.29 billion from £0.81 billion, primarily due to the cash acquisition of TFSM and increased borrowings to fund share buybacks and dividends.

Guidance, Outlook, and Risks

Outlook: Management budgets for 2008 indicate like-for-like revenue growth at higher levels than the 4.0%–4.5% seen in early 2007, with balanced growth across halves. Marketing services revenues are expected to grow faster than Advertising and Media Investment Management.

Strategic Priorities:

• Prepare for potential economic deterioration in 2009 following the financial crisis.
• Increase geographic share of revenues from emerging markets (Asia Pacific, Latin America, Africa, Middle East, Central/Eastern Europe) from ~25% to one-third over 5–10 years.
• Increase share of marketing services revenues from ~54% to two-thirds.

Key Risks:

• Client Concentration: Top 10 clients accounted for 19% of 2007 revenues; loss of a major client could materially impact results.
• Competition: Highly competitive industry with clients able to terminate agreements on 90 days' notice.
• Currency: Significant exposure to foreign exchange fluctuations as revenues are derived globally but reported in GBP.
• Goodwill Impairment: Risk of future impairment charges if acquired businesses underperform or economic conditions deteriorate.

Investor Verification Checklist

• Client Concentration: Verify the stability of the top 10 clients (BAT, Ford, GlaxoSmithKline, IBM, Johnson & Johnson, Kraft, Microsoft, Nestlé, P&G, Unilever) which represent 19% of revenue.
• Goodwill Valuation: Review the assumptions used in the annual goodwill impairment test (discount rate of 11.0%, growth rate of 3.0%) given the £44.1 million charge in 2007.
• Debt Covenants: Confirm compliance with financial covenants (Interest coverage ratio > 5.0:1; Borrowed funds to EBITDA < 3.5:1).
• Share Buybacks: Verify the execution of the share repurchase program (59.2 million shares repurchased in 2007 at an average price of £7.03).
• Dividend Sustainability: Assess the ability to maintain the 20% dividend increase (total 13.45p per share) given the increase in net debt.