• by Joe Mandese  @mp_joemandese, May 1, 2018

Using an insightful common denominator -- the average annual revenue generated per employee -- Omnicom stands out with an advantage of 30% or more over the rest of its peer agency holding companies.

The analysis, published by Wall Street equities researcher Pivotal Research Group as part of its assessment of 2017 annual reports from the five most comparable holding companies -- Omnicom, Interpublic, WPP, Publicis and Havas -- finds Omnicom's $194,000 per employee is 30% higher than its next-closest peer, and the only other U.S.-based company in the mix, Interpublic’s $150,000 per employee.

The reason for the gap, says Pivotal analyst Brian Wieser, is the different ways that agencies report “media trading” as revenue.

“Our analysis of these activities suggests to us that Omnicom’s underlying margins for the same activities that peers perform are much higher than commonly perceived,” he writes in a report sent to investors this morning adding: “This suggests that high ‘teens margins are achievable, and, we think durable for companies in the sector, especially including U.S. peer Interpublic, which has a similar geographic footprint and which produced a 12.6% margin against net revenue during 2017.”

Wieser’s analysis suggests the difference relates to the way Omnicom books “principle trading activities” as revenue via new accounting definitions: Omnicom’s gross and net revenue are nearly identical vs. a 10% difference at Publicis, an 18% difference at Interpublic and a 21% difference at WPP.

“From press releases and other published sources, we know that Omnicom’s barter agency Icon has claimed to place around $1.5 billion in media annually,” Wieser continues, adding: “A small amount of last year’s revenue would have been recorded through April 2017 because of Novus (a print media-focused buying agency which evidently booked its media trading as revenue).

“And then there is OmNet, which engages in principal trading of traditional media and so far as we can tell from various Linkedin profiles, it continues to expand around the world. We don’t know how big the unit is, but we think it is a key source of the company’s reported revenue growth. By contrast, Accuen (Omnicom’s programmatic platform which also engages in principal-based buying) is likely responsible for less activity year-over-year as the centralized trading desk concept shifts to one centered around the company’s individual agencies (although programmatic trading-related revenue could be booked there as well). Put together, trading activities from these entities could easily account for the aforementioned 30% “premium” on revenue-per-employee that Omnicom generates relative to Interpublic.”

Wieser’s forensics reveal an important insight, because it implies differences in the profit margins of the major agency holding companies.

“Applying IPG’s revenue-per-employee figure to Omnicom would reduce Omnicom’s reported revenue by $3 billion,” he says, adding: “If we did so, Omnicom’s EBIT margin would no longer be the 13.5% it reported, but 17.6% instead.”

On the downside, Wieser notes that Omnicom likely has “less room” for longer-term growth than its peers.

On the bright side, he notes the other holding companies have considerable upside in improving their margins.

“We think that this kind of margin is probably illustrative of the margin that Interpublic has potential to grow into from last year’s 12.6% level, and also supports the idea that other holding companies should themselves be capable of producing high ‘teens margins on an ongoing basis,” he says.