Commentary

The Complexity Of Holding Company Earnings And Transparency

Omnicom, the agency holding company, reported Q2 earnings yesterday and missed its revenue targets, citing issues with exchange rates.  Omnicom Media Group owns Accuen, the programmatic trading desk -- which got us thinking about revenues from programmatic media trading. Omnicom provided few details to investors.

The revenues for Omnicom’s programmatic trading unit weren’t broken out. Where is the transparency in that?  Since everyone is talking about transparency, agency rebates, and the like, RTBlog thought this was a pertinent and related topic.  Accuen accounted for $18 million in new revenue -- or +0.5% of total organic growth -- during the quarter.

Brian Wieser, senior research analyst, advertising, at Pivotal Research Group, explained that the context of transparency and something he referred to as “pass-through” can be two separate things. Investors tend to require transparency on financial statements. Programmatic activity is conflated with pass-through activity, according to Wieser. “The question is, what was Accuen’s pass-through activity? It’s incomplete. Investors need to assess the underlying health of the business. You have to be able to strip out pass-through activity,” he said.

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Pass-through is the idea that if you book revenue in association with a product that you’re going to resell back to the client when you know with virtual certainty that the client is going to buy it from you, the holding company should be booking it as revenue, since the company is serving as an intermediary.

This is an issue in ad tech. For example, if an ad-tech company goes public and says it has 40% revenue growth, the easiest way to boost revenue is to tell customers it will sell the inventory to them for exactly the same money as it’s worth. So it’s not an economically additive activity, but the companies claim it as revenue.  Now, is that transparent? And, is it actually revenue?

All of this can be misleading if people don’t understand it. In addition, you have to know whether it’s gross or net revenue, or what other type of revenue it is. Wieser said focusing on the gross revenue numbers can be helpful.

Take Google. The company recently increased its gross revenue at a pace faster than its net revenue. The company’s scale is consistent with that gross revenue number. Also, gross revenue might be booked as GAAP (generally accepted accounting principles), which is an interesting benchmark since it suggests some degree of scale and volume, according to Wieser.

In contrast to Omnicom, Wieser finds that WPP’s GroupM has not shied away from the benefits of non-transparency; its programmatic unit, Xaxis, is “proudly non-transparent,” he said.  “I believe that in all holding companies, there are forms of revenue that clients don’t fully understand. The most sophisticated clients do understand. The holding companies need to better account for the concerns that  clients have,” Wieser said, adding, “it’s possible that agencies could be operating with the best of intentions -- and yet problems still exist."

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