Publicis First-Half Profitability Drops Amid Hiring Push to Bolster Sales

Publicis Groupe SA (PUB)’s first-half profitability fell as the third-largest advertising agency spent more on salaries and new employees to bolster sales in emerging and digital markets. The stock dropped the most in more than four months.

The operating margin, the income as a percentage of net sales, declined by 1 percentage point to 13.5 percent, the Paris-based company said in a statement today.

Publicis, which owns the Leo Burnett and Saatchi & Saatchi advertising agencies, is making acquisitions in faster growing markets such as Latin America and Asia and in digital marketing tools as economic growth in Europe and the U.S. is damped by high debt and unemployment. Publicis said today it will prioritize hiring and that it increased pay this year after a two-year salary and recruitment freeze.

“They had to spend a lot more on salaries,” said Paul Gooden, a managing director at Royal Bank of Scotland Group Plc in London. “Good growth, but disappointing margins.”

Publicis declined as much as 4.2 percent to 36.24 euros in Paris trading and was down 3.4 percent as of 9:30 a.m. The stock had fallen 3 percent this year before today.

Sales increased 2.7 percent to 1.41 billion euros ($2.01 billion) in the second quarter. Analysts had estimated 1.44 billion euros, according to a Bloomberg survey. Net income rose 8.5 percent to 231 million euros in the first half.

‘Disappointing’

Liberum Capital analysts Ian Whittaker and Peter Madden, which had expected net income of 272 million euros, today cut their recommendation on Publicis shares to “hold” from “buy” following the “disappointing” results.

Latin America was the company’s fastest growing region in the second quarter, increasing revenue by 25 percent from a year earlier after the company made acquisitions in Brazil. Africa, the Middle East and Europe grew 11 percent and Asia increased by 3.2 percent. Sales in North America, Publicis’ largest region by revenue, declined 5.9 percent.

“We are also worried about the slowdown in growth in North America, especially given it is where Publicis’ higher growth media and digital businesses have their base,” Liberum’s Whittaker and Madden said.

Publicis, whose clients include Microsoft Corp. (MSFT) and Walt Disney Co. (DIS), said its recruitment centered on its new digital services.

“Boosting our margin remains a priority, and in the second half we’ll be harvesting the first results of that goal,” Chief Executive Officer Maurice Levy said in the statement. He reiterated a target to grow more than the overall market in 2011.

Acquisitions

Levy said last month he will spend at least 700 million euros on acquisitions this year, up from a previous target of as much as 500 million euros. Publicis could spend even more if a particularly compelling deal comes along, he said.

The company in June agreed to buy China’s Genedigi Group to become the largest public relations network in the country. Genedigi had 400 employees and offices in Beijing, Shanghai and Guangzhou. Publicis has said it expects its Chinese business to double by 2013.

Publicis has announced the acquisitions of more than a dozen companies so far this year, almost matching the number of 2010 deals, according to Bloomberg data. The company’s current targets are significantly smaller than the 575-million euro acquisition of Rosetta Marketing Group, which was announced in May, Levy said in June.

Rosetta will join the French company’s digital-oriented brands such as Digitas and Razorfish, and be part of a strategy of expanding that segment to 35 percent of group revenue in 2013 from 28 percent last year, Publicis has said.

(The company will host a conference call to discuss the results at 12pm Paris time. To access the webcast, go to www.media-server.com/m/p/a8j5dp96.)

To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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