Transparency Impacts Agency Comps: Omnicom 'Exclusions' Drag Entire Sector

The Big 5 agency holding companies grew 1.7% during the first quarter, marking a “deceleration” from “+4%” rates of growth in recent prior years, according to a top Wall Street analyst tracking Madison Avenue stocks.

In terms of North America, the Big 5 -- WPP, Omnicom, Interpublic, Publicis and Havas -- actually declined 0.3% during the first quarter, according to estimates published by Pivotal Research’s Brian Wieser in a note sent to investors this morning.

Wieser indicated that growth comparisons are somewhat apples to oranges because of the “exclusion and non-disclosure of pass-through revenues,” especially at Omnicom.

He did not explain the reasons for the change, but alluded that it was related to “enhanced scrutiny that marketers have placed on media agency fees in the wake of the [Association of National Advertisers’] investigations into fee transparency,” and added, “the narrative won’t go away any time soon within the investment community.”



Wieser’s analysis indicates that Omnicom has the greatest current exposure related to the change, noting:

“Pass-through activities are typically minor and disclosed by Interpublic, and they are not particularly meaningful for Publicis or Havas. However, they are significant for Omnicom, which generates around 30% of its global revenue base from such activities on our estimates.

“These pass-throughs account for perhaps $4 billion globally on our estimates from entities including Icon, Omnet, Accuen and Novus (which Omnicom has just announced it was selling this month).

“These businesses are U.S.-based and probably amount to a higher share of U.S. activity.”

In the short term, Wieser said the changes distort Omnicom’s results, creating a lower apples-to-oranges comparison that “if they were reported on a basis that was comparable to other holding companies.

“It only takes a 3% change in pass-through activities at Omnicom ($50 million of that $4 billion of estimated pass-through activity at a global level on an annual basis) to impact industry-wide revenue growth figures by 1%,” he Wieser concluded, adding: “While it is very possible such activities have been more extreme than this on an annual basis, it seems unlikely that changes in these activities were sufficiently extreme to change the overall deceleration narrative.”
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