WPP

WPP Plc: 2004 Annual Report (Form 20-F) Summary

Business Context and Reporting Period

Company: WPP Plc (WPP Group plc)
Reporting Period: Fiscal year ended December 31, 2004
Industry: Global advertising and marketing communications services
Overview: WPP is one of the world's largest communications services groups, operating through four main segments: Advertising and Media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding, identity, Healthcare, and Specialist communications. As of December 31, 2004, the Group employed approximately 60,000 people across 2,000 offices in 106 countries. The reporting currency is the British Pound Sterling (GBP).

Key Financial Metrics (UK GAAP)

Note: US GAAP Net Income for 2004 was £149.3m, significantly lower than UK GAAP due to accounting differences regarding goodwill, contingent consideration, and pension accounting.

Material Changes vs. Prior Period

• Revenue Growth: Reported revenue grew 4.7% to £4.3 billion. On a constant currency basis, revenue increased by 11.4%, driven by strong organic growth and acquisitions. Like-for-like revenue growth was over 4.0% (5.6% excluding the Cordiant acquisition impact).
• Profitability: Operating profit rose 16.7% to £484.6 million. Operating margins improved from 10.1% to 11.3%. Excluding goodwill amortisation and impairment, margins increased to 14.1% from 13.0%.
• Goodwill Impairment: The Group recorded a goodwill impairment charge of £36.0 million in 2004 (compared to £48.2 million in 2003), primarily related to under-performing first-generation businesses.
• Acquisitions: In 2004, the Group spent £224.5 million on acquisitions and investments. A significant subsequent event was the acquisition of Grey Global Group, completed on March 7, 2005, for £384 million in cash and 78 million new shares.
• Cost Management: Staff costs excluding incentives rose 5.1%. The ratio of variable staff costs to revenue increased to 7.1%, enhancing cost flexibility. Non-staff costs as a proportion of revenue fell to 23.4%.

Guidance, Outlook, and Risks

Outlook and Guidance:

• 2005 Forecast: Management expects worldwide advertising and marketing services spending to grow 2-3% in 2005 (down from 3-4% in 2004). Like-for-like revenue growth is budgeted at 3-4%.
• Margin Targets: The Group aims to raise operating margins (excluding goodwill amortisation/impairment) to 14.3% in 2005, 14.8% in 2006, and potentially cross 15% in 2007, with a long-term goal of 20%.
• Strategic Priorities: Focus on integrating the Grey acquisition, increasing geographic share in emerging markets (Asia Pacific, Latin America, Africa, Middle East, Central/Eastern Europe), and increasing the share of marketing services revenue.

Key Risks and Contingencies:

• Client Concentration: The top 10 clients accounted for approximately 31% of 2004 revenue. Loss of a major client could materially impact results.
• Competition: The industry is highly competitive with short-term client contracts (often terminable on 90 days' notice).
• Currency Exposure: Significant international operations expose the Group to foreign exchange fluctuations, particularly against the US Dollar and Euro.
• Goodwill Impairment: The Group holds significant goodwill (£4.8bn). Future impairment charges could materially impact financial condition if cash flow projections are not met.
• Regulatory Environment: Subject to varying regulations on advertising content, data privacy, and lobbying across 106 countries.

Investor Verification Checklist

• US GAAP vs. UK GAAP Reconciliation: Verify the significant difference between UK GAAP Net Income (£292.3m) and US GAAP Net Income (£149.3m), specifically regarding the treatment of contingent consideration as compensation and goodwill amortisation.
• Goodwill Valuation: Review the assumptions used in the annual goodwill impairment test, particularly the weighted average cost of capital (8.1%) and long-term growth rates, given the £4.8 billion goodwill balance.
• Grey Acquisition Integration: Assess the financial impact and integration progress of the Grey Global Group acquisition (completed March 2005), which added significant scale but also debt and integration costs.
• Client Concentration: Monitor the stability of the top 10 clients (Altria, American Express, BAT, Ford, GlaxoSmithKline, IBM, Nestle, Pfizer, Unilever, Vodafone) which represent nearly one-third of revenue.
• Pension Deficit: Review the defined benefit pension scheme deficit, which stood at £202.3 million as of December 31, 2004, and the associated future contribution requirements.
• Free Cash Flow Utilization: Confirm the deployment of free cash flow (£448m) towards debt reduction, acquisitions, share buybacks (£89m), and dividends (£82m).