DAN's results drag Dentsu numbers down, Asia the biggest laggard

Dentsu, the Japan-based agency network, continues to be battered by the impact of the Covid-19 pandemic, as its home business and international operations continue to struggle for revenue growth and profitability. For the April through June 2020 quarter, it announced that its revenue, less cost of sales, declined by nearly 18% to 18.1 billion yen (US$169.5 million), while its operating profit declined by 39.2% year-over-year to 4 billion yen ($37.5 million). 

The international operation, Dentsu Aegis Network, weighed down the results the most, with revenue less cost of sales down 21.3% year-on-year to 10.7 billion yen ($100.2 million), compared to a 12.3% drop for its Japan operations.

The Asia-Pacific market, where DAN has rolled its creative interests into Dentsumcgarrybowen, fared the worst. Australia, India and Thailand also saw organic de-growth of over 20% according to a company presentation. Germany, Russia and Switzerland are the only markets to grow in this quarter. 

A look Dentsu's results for the first half off the year, gives us a better understanding of the impact of cuts made back in December 2019. Due to these cost reductions, the company's operating profit increased by nearly 15%, even as its revenue less cost of sales dropped 9%, its impact less than originally feared, due to cost cuts.

In addition, operating margin increased 270 basis points (+240 basis points on a constant currency basis) year-on-year to 12.9%. The Group is tracking ahead of the targeted 7% cost reduction against the planned FY2020 consolidated cost base, Dentsu announced. 

Given the cloudy global economy, Dentsu declined to make a detailed guidance for FY2020 available. Instead, the network noted that "the impact from Covid-19 continues to cause a slowdown in demand for services across the industry. The timing and level of recovery is expected to vary by market—yet the overall macro-economic trend remains uncertain."

Instead, Dentsu stated that it expects the second half of FY2020 to show a modest improvement in the rate of organic revenue decline versus the second quarter. Q2 FY2020 is still expected to have been the weakest quarter, but the decline in revenue will exceed the running rate of cost savings in the second half of FY2020. 

The network expects to squeeze costs, but with no end to the pandemic in sight the downturn will continue, albeit at a reduced pace, in the second half of this year, with a slow recovery expected in 2021. Dentsu has therefore launched a comprehensive review and accelerated transformation plan, to manage its business in this environment. No more details were disclosed.