Dentsu reports improved earnings, led by its domestic business in Japan

While the Japan business has recovered strongly, its international unit, especially APAC was a drag on third quarter metrics

Nov 15, 2021 04:37:00 AM | Article | Rahul Sachitanand

Dentsu reported a strong set of numbers for the third quarter of its financial year, as improved business sentiment helped boost performance of both its Japan and international businesses in this period. For Q3, the world's fifth largest ad network reported its revenue increased by 29.7% on year and operating profit by almost 161%.

As part of its business transformation, the network announced that that after five years as CEO, Toshihiro Yamamoto will retire from the role, effective January 1, 2022. He will be succeeded as chief of the Japanese-based holding company by Hiroshi Igarashi, current president and CEO of Dentsu Inc., the company responsible for Dentsu's domestic operations in Japan.

Dentsu Japan saw a recovery across all advertising mediums, with particular improvement in in television and digital solutions, the firm reported. Dentsu International's growth was driven by the continued recovery in media, even as CXM also saw double digit organic growth. Strength in the structural growth areas of commerce and experience continued, with demand strong for technology implementation, data services and activation, through creative and media.

In Japan, spend across all advertising mediums continued to recover with Dentsu Japan Network seeing an improvement driven by Internet sales +35.6%. Content services (+355.5% yoy), TV (+35.3% yoy) and creative (+14.7% yoy) also showed a substantial increase. On October 28, the group announced that it would make Septeni Group a consolidated subsidiary on January 4, 2022, expanding Dentsu Japan Network’s market share to become the largest digital marketing company in Japan.

For its international business, the US market's growth was driven by by media which reported over 25% organic growth in the quarter, CXM drove growth in Europe, where creative was yet impacted and in APAC too the network reported higher than expected growth in CXM. APAC's geographic performance was mixed, with Australia, Singapore and Indonesia faring well, even as China struggled.

For the third quarter, in terms of organic growth, Dentsu overall grew by 27.8%, with Japan growing at nearly 50% and International more muted at 14% growth. The international business' more muted performance was especially dragged down by the APAC business which was up just 7.6% this quarter, compared to 16.3% for the Americas and 12.9 for EMEA.

Buoyed by this performance. the Group has increased its FY2021 guidance. Dentsu expects to deliver around 12% organic growth for FY2021. Growth in the fourth quarter in Japan is, however, expected to be more modest, leading to guidance of 17% organic growth FY2021 with guidance for Dentsu International at high single digit for FY2021. The cost of business transformation has been reduced from JPY 28 billion to 16 billion as of August 2021 on a consolidated basis.

A glance at Dentsu's nine-month performance for this fiscal gives us a better understanding of the pace of transformation at the network. Total revenue, less cost from digital activities grew to 51.9% and from customer transformation & technology reached 28.7% of group revenue. The Group reaffirmed its target of 50% of revenue (LCoS) from customer transformation and technology "over time."

For this same period, the group's underlying operating profit increased by 73.9% (71.7% on a constant currency basis) YoY to JPY 131.8 billion. Operating margin improved by 630 basis points (650 basis points on a constant currency basis) to 18.9%, due to an increase in revenue and effects of cost-cutting. Of this, Dentsu Japan's underlying operating profit was up by +87.4% YoY and operating margin increased nearly 10% to 26.9%. At Dentsu International, profit rose nearly 50% and margin by 3.5%.