Think BR: When prophets of profit prove a disappointment
What is an investor in the marketing sector supposed to believe when recent financial communications have proved to be unfathomable, asks Bob Willott.
Bob Willott: editor of Marketing Services Financial Intelligence
In publishing a trading update last Friday, the digital marketing group Weare 2020 showed rather less forward vision than the company’s name might imply.
Then this week Huntsworth took a distorted look through its rear view mirror in an attempt to show that a halving of profits wasn’t really a halving at all and was certainly nothing worse than it had already predicted (although of course companies don’t make profit predictions, but allow their brokers to do it for them).
Weare 2020 – once more sensibly known as Digital Marketing Group - put out a statement that must win first prize for gobbledegook.
Was it trying to temper market expectations about its results for the year to 31 March?
The announcement was full of "on the one hand" and "on the other hand" statements, but it is doubtful whether anyone was any the wiser afterwards.
Even a statement that the company expected to report an "adjusted" profit before tax of £3.1 million meant nothing without knowing what the adjustments would be.
So why put out a statement at all if it doesn’t add something useful to investors’ existing understanding?
Huntsworth is a much bigger and more experienced operation than Weare 2020. What’s more, one of its main specialisations is financial communications.
That expertise may have encouraged the company to bolster its financial image beyond what appears to be warranted by the actual financial performance.
In 2010 Huntsworth made a pre-tax profit of nearly £22 million. And at the beginning of 2011 no-one seemed to be expecting the company do any worse in the current year.
This is what chief executive Lord Chadlington and chief operating officer Sally Withey said in their joint review dated 22 March 2011: "72% of our 2011 expected revenues are committed which is £5.5m higher than 2010.
"Whilst we expect both revenues and profits to be weighted towards the second half of 2011, we remain confident that we are on target to meet management’s full year expectations and achieve like-for-like growth of 7% plus during 2011."
What actually happened? By November last year we were being warned that revenue shortfalls would result in the pre-tax profit falling below market expectations by £4m.
Then in January we were told that some £3m of restructuring costs had been incurred.
Using simple arithmetic, an innocent reader would have assumed that the original hope of a 7% profit uplift in 2011 would have resulted in a pre-tax profit of over £23m, and that in light of the subsequent profit warnings this would have to be adjusted downwards by £7m to £16m.
The outcome for 2011 was that the pre-tax profit fell dramatically by 52% to £10.6m. Revenues struggled to grow at all – adding just 1.5% to the 2010 level. And normal operating costs rose by 6.2%.
Yet Huntsworth would have us believe something entirely different. According to the front page of its formal announcement, the "profit before tax" for 2011 was £19.1m (almost twice the actual result) and this should be compared with £26.7m in 2010 – a fall of 28%.
How can that be?
It is only possible to arrive at the £19.1m pre-tax profit figure by ignoring some fairly big items – like restructuring costs, litigation costs, amortisation of intangible assets, acquisition related costs and share incentive charges.
Some of these items may be regarded as the product of accounting purists who have little understanding of the real business world, but they are costs that are legally required to be charged in arriving at what is described as "profit before tax".
The bottom line is that few people will be able to decide which of the two Huntsworth profit figures they should believe.
And no-one has a clue what profit or loss Weare 2020 has made.
Bob Willott is editor of Marketing Services Financial Intelligence
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