Dentsu turnaround continues in Q2 driven by healthier margins

After many difficult quarters, Dentsu Group's business performance continued to improve in Q2 with a 15% gain in organic revenue growth on a year-on-year basis (12.0% at Dentsu Japan Network and 17.0% at Dentsu International). In percentage growth terms, this marks a sharp turnaround from the 2.4% drop in organic revenue in Q1 and much steeper losses in the three quarters prior. 

Similarly, total revenue less cost of sales (LCOS) rose 20% in Q2 to improve to 7.8% in H1 on a constant currency basis after rebounding from a 1.8% decline in Q1. 

But the stellar year-on-year growth in Q2 2021 is in comparison with a disastrous Q2 a year ago when the Covid outbreak froze a significant portion of Dentsu's business activity. 

Topline revenue was in fact slightly lower than the previous quarter at 243.9 billion yen (US$2.20 billion). Likewise, underlying operating profit of 26.6 billion yen ($240 million) soared 71.6% compared to the same depressed quarter a year ago, but is down from the 44.9 billion yen ($411 million) reported last quarter.

Nonetheless, profit (alongside revenue) at Dentsu remains stronger than during the height of Covid difficulties thanks to improvements in operating margins that are exceeding expectations as cost reductions have kicked-in to work in tandem with the rising sales. Dentsu reported an operating margin listed at 12.2% in Q2, representing a 370 basis point improvement year-on-year. 

“Dentsu Group delivered a strong second quarter performance, reflecting the growing consumer and client confidence we see across all regions," said Toshihiro Yamamoto, Dentsu Group president and CEO in a release. "Underling profit growth continues to be strong, exceeding our expectations, and demonstrates our commitment to our margin targets."

More than half (52.2%) of Dentsu's total revenue (LCOS) came from digital activities in the first half of 2021. Customer transformation and technology, which Dentsu would like to see reach 50% of revenues, continues to tick upwards and formed 29.4% of revenues in H1. The Group pointed to its acquisition of LiveArea announced last month as a catalyst for reaching its goal. 

International business

Dentsu's international business had been a source of concern in recent years compared to its steadier Japanese domestic business. In comparing year-on-year organic revenue growth, Dentsu's international markets have been able to take greater strides toward recovery as reflected in their Q2 gains, with EMEA up 22% from a year ago, the Americas 15.5% with APAC 10.2% and Japan 12.0%.

Dentsu says EMEA saw double-digit organic growth across all three service lines of Media, CXM and Creative in Q2 with France, Spain and the UK all gaining more than 20% for the quarter. 

Both Canada and the US performed well as the North American market benefitted from a stronger media performance that Dentsu expects to continue into the second half. It says stronger new business wins from the Creative service line will be beneficial as the impact of clients lost last year will end this quarter.

APAC (excluding Japan) reported double-digit growth from Australia, Indonesia, South Korea, Singapore and Thailand. China saw high single-digit organic growth while India's revenue declined in Q2 with a resurgence in the Covid pandemic. 

The Group further reports that Dentsu International's transformation is ongoing with over a third of the targeted agency brands 'optimised' as it chops down the number of brands from 160 to six. It has already hit its targets for rationalising its properties for FY2021 and is 25% of the way to its goal in reducing legal entities.

Looking ahead, Yamamoto said: "Whilst the future path of the pandemic remains uncertain, our full year guidance confirms our confidence in the outlook for the second half of FY2021, as well as our ability to meet our medium-term targets by 2024." 

(This article first appeared on CampaignAsia.com)