DENTSU GROUP INC. Q1 FY2026 earnings call

Strategic Direction

• Dentsu's core goal is to become a medium/long-term growth partner for clients, built on three core pillars: strengthening client centricity, enhancing organizational agility, and accelerating cross-entity collaboration.
• Client centricity means proactively anticipating unrecognized client challenges instead of only responding to existing needs, delivering tailored solutions to drive sustained client growth. Agility is achieved by flattening management layers to speed up decision-making and reduce distance between leadership, frontline teams, and clients. Collaboration integrates internal Dentsu capabilities plus external client and partner expertise to deliver seamless end-to-end solutions.

Operational Restructuring

• **EMEA reorganization: EMEA's previous 7 regional clusters will be consolidated into 3, with EMEA headquarters roles streamlined to reduce redundancy. All new cluster CEOs will report directly to the Global CEO to accelerate decision-making and align with global strategy. The restructuring is expected to deliver an additional 1.7 billion yen in annual cost savings.
• **ANZ transformation: Dentsu will divest its underperforming, low-synergy CRM sub-segment of its CXM business, with the transaction expected to close in Q3 FY2026. The divestment will cut annual costs by ~2.5 billion yen, with an additional several hundred million yen in annual function-related cost reductions expected. Dentsu will retain and grow experience commerce, data, and technology capabilities within ANZ CXM. The ANZ region, which has had three consecutive years of organic decline, is expected to return to low single-digit growth starting in FY2026.

New Business and Recognition

• Dentsu won multiple high-profile global client pitches in Q1, including Heineken global media, Samsung Electronics Europe CRM Transformation across 16 markets, Tapestry media across India, APAC and Japan, iHealth integrated media and creative AOR in the Americas, and a new marketing strategy partnership with MUSG in Japan.
• Dentsu was named Network of the Year for the 10th time and 5th consecutive year at ADVEST, with additional recognition across creative, sports, and entertainment categories.

AI and Media Capabilities

• Dentsu's AI for Growth vision combines human intelligence with AI to drive client and business growth, not just internal efficiency. Dentsu prioritizes flexible, open AI systems tailored to each client's existing data and infrastructure rather than locked-in proprietary platforms.
• In Japan, over 4,500 AI agents and 1,300 AI applications are already in use. Dentsu Digital's Mugen AI Ads solution, which optimizes digital ad production, has been deployed for over 200 clients, delivering an average 1.5x improvement in ad effectiveness. An updated AI for Growth 3.0 strategy will be announced later this quarter.
• Internationally, Dentsu's unified Dentsu.Connect operating platform already has over 1,900 enrolled clients, with an update scheduled for Q4 FY2026. The new ClientIQ chat-based AI agent captures and shares internal expertise to speed up and improve client proposal development.
• International media growth is focused on four key priorities: AI-powered media planning, proprietary digital solutions, retail media capabilities, and social media capabilities.

Consolidated results: Net revenue rose 2.7% year-over-year to 295.1 billion yen, underlying operating profit rose 11.5% to 37.8 billion yen, and operating margin reached 12.8%, up 100 basis points year-over-year. Statutory net profit hit 40.2 billion yen, largely driven by gains from the sale of the Dentsu Ginza building.

1. Japan: Accounts for 44% of consolidated gross net revenue. Achieved 4.7% organic growth, the 12th consecutive quarter of positive growth. Organic performance exceeded expectations, driven by strong demand for TV and internet advertising; internet advertising posted 9 consecutive quarters of double-digit growth, while TV advertising posted mid-single-digit growth. The operating margin improved to 30.8%, up 180 basis points year-over-year.

2. Americas: Posted 3% organic decline, in line with expectations. Media achieved 0.5% organic growth, CXM posted a slight organic decline (its fifth consecutive quarter of recovery), and Creative recorded a 12.4% organic decline due to prior year project losses. Operating margin was 16.1%, down 160 basis points year-over-year, in line with expectations.

3. EMEA: Achieved 0.8% organic growth, in line with expectations. Net revenue rose 15% year-over-year, primarily due to yen weakening against the pound and euro. By practice, media posted 5.3% organic growth, CXM declined 5.7%, and Creative declined 5%. Operating margin reached 3.1%, with underlying operating profit turning positive due to cost controls.

4. APAC: Posted 7.5% organic decline, in line with expectations. Media declined 2.5% organic, CXM declined 24.2% organic (driven by client losses and reduced spending in Australia), and Creative declined 9.5% organic. Underlying operating loss was flat year-over-year due to strict SG&A cost controls.

• Dentsu reiterates its full-year FY2026 guidance originally announced in February. While Q1 organic growth and operating margin slightly exceeded expectations, management maintains the existing full-year forecast as all known risks (including expected large client revenue declines in the Americas second half) have already been incorporated.
• Japan's full-year organic growth target of 2% to 3% is maintained, despite a stronger-than-expected Q1, due to high macroeconomic uncertainty reducing visibility into client marketing demand.
• Americas full-year guidance of approximately 2% organic decline is maintained. EMEA's full-year guidance of approximately 1% organic growth is reiterated. APAC's full-year guidance of approximately 1% organic growth is also maintained, supported by recent competitive pitch wins that give management confidence in meeting full-year targets.
• The expected non-payment of dividends for FY2026 remains unchanged. Management is targeting an improvement in distributable profit of 70 to 80 billion yen to reach approximately 310 billion yen by the end of FY2026, with non-consolidated net assets expected to turn positive at approximately 20 billion yen to support a future resumption of dividends.
• Management is currently updating its mid-term management plan, with an update on redefined objectives and targets expected in the coming months.

• Rising global macroeconomic uncertainty, driven by prolonged geopolitical risks and elevated resource and energy prices, has reduced visibility into client business conditions and marketing budget decisions, making it difficult to accurately estimate impacts on full-year performance.
• Geopolitical risk has already caused moderate advertiser hesitation across global markets, particularly driven by rising oil prices affecting corporate sentiment across sectors. While there is some impact from Middle East tensions, the region accounts for less than 1% of consolidated net revenue, so direct impact is negligible.
• The Americas faces expected revenue decline from certain large media clients starting in the second half of FY2026, though this risk is already incorporated into existing full-year guidance.
• CXM segments continue to face performance challenges in EMEA's large markets (UK, Switzerland) and across APAC, particularly in Australia, leading to organic declines in these regions.
• International competition from large, scale-focused peer groups creates pressure, though Dentsu believes its integrated, agile value proposition offsets this scale disadvantage.

Q: Has geopolitical risk already impacted regional advertising demand, and what challenges were identified for EMEA/ANZ restructuring? Are the associated cost savings already incorporated into disclosed guidance?

A: There is limited direct impact from Middle East tensions, as the region is a very small share of total revenue. However, rising oil prices from geopolitical risk have created mild advertiser hesitation across all global regions, though the impact is not yet severe. For EMEA, the core challenge was redundant overlapping roles between the old seven-cluster structure and regional headquarters; the associated 1.7 billion yen in annual cost savings are not yet incorporated into guidance. For ANZ, the divested CRM business had low profitability and limited synergy with core operations, with some but not all cost savings already included in forecasts, with additional savings coming in future periods.

Q: What additional restructuring challenges exist for international business, and will Dentsu pursue organic growth or external partnerships to compete with large-scale peer competitors?

A: Beyond structural changes, Dentsu is working to embed agile, collaborative mindsets into employee behavior by flattening reporting lines (all regional and practice leaders now report directly to the Global CEO to cut decision delay) and updating KPIs and behavioral guidelines to break down internal silos. Against large-scale peers, Dentsu will compete on integrated solution quality and team agility rather than pure scale, which has already helped it win large global pitches. Dentsu is open to proactive partnerships with technology firms such as Adobe and Salesforce that are also clients, rather than financial or scale-focused partnerships.

Q: Can Dentsu leverage AI capabilities outside traditional advertising to create new growth domains, via technology partnerships?

A: Yes, Dentsu is already expanding AI use beyond advertising. One example is the new HR for Growth initiative with Microsoft, which uses client company data from Microsoft 365 to identify internal HR silos and help clients optimize workforce allocation. This type of non-advertising AI-enabled client solution has launched in Japan, and Dentsu plans to replicate the model in other global markets.

Q: Why does Dentsu maintain full-year APAC growth guidance despite a large Q1 organic decline?

A: Management maintains the full-year guidance of ~1% organic growth because Dentsu has recently won multiple competitive pitches in the region that are expected to contribute revenue later in the fiscal year, providing concrete support for meeting the full-year target.