APAC weakness weighs on Dentsu earnings

For the second straight earnings report, Dentsu is citing persistent weakness in its Chinese and Australian businesses for weighing down its global and regional results.

In the first nine-months of fiscal 2019, the Dentsu Group has reported a decline in organic growth of 1%, with a 0.9% decline in Japan and a 1% decline in its international Dentsu Aegis Network business.

The APAC region was the main drag on organic growth internationally, falling 9.7% in the first nine months and dropping 12.3% in third quarter alone. Most of the decline came from China and Australia, where "there are no shoots of recovery in either market, both of which continue to severely impact the regional and group performance" Dentsu's earnings statement said.

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Excluding the impact of China and Australia, Q3 organic growth for Dentsu Aegis Network globally was 1.8%, helped by strong momentum in the US. The Americas grew 5%, while EMEA slipped 1%, held back by negative results in the UK and France. 

"In order to futureproof our [international] business and serve clients more effectively, we have
streamlined and consolidated our offering around three lines of business: Creative, Media and CRM." Dentsu Inc. president and CEO, Toshihiro Yamamoto said in a release. He added, "2020 is a year of transition and by 2021, we will be operating under these three lines of business and be truly integrated by design."

Domestically, Dentsu cited a lack of large-scale sporting events and a decline in traditional media for the softer market, but noted the latter is being offset by a shift towards digital-related services.

"We continue to see the shift of revenue from traditional media in Japan into digital channels and this is clearly reflected in the performance of our Group companies, such as Dentsu Digital, ISID and other subsidiaries," Yamamoto said. "We continue to capture the transfer of value as marketing shifts from traditional mediums." 

Looking ahead, Dentsu predicted the Japanese business would pick up in Q4 with help from the Rugby World Cup and Tokyo Motor Show and continued momentum in the Americas. 

Overall revenue figures for FY2019's first nine months improved slightly from the first half with revenue, excluding cost of sales, slightly improved at 3.3% for Dentsu Group overall, with Japan revenues up 1.4% and DAN gaining 4.6%. 

But these gains were largely driven by M&A to offset the organic slowdown. Dentsu has signed a total of eleven new acquisitions so far this fiscal year: three in EMEA, two in the Americas and six in APAC.

Group underlying operating profit for the same period slipped to 75.5 billion yen (US $694 million), down from 89.5 billion yen (US $823 million) in the first nine months of FY2018. Underlying operating margins dipped to 11.2% in the first nine months of 2019, compared with 13.4% the year prior. 

There is no further change to Dentsu's financial forecast for the year, however.