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Pandemic continues to weigh on ad agencies, though some Q3 improvement expected


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Pandemic continues to weigh on ad agencies, though some Q3 improvement expected

The continuation of the pandemic is expected to weigh on the advertising market through the rest of the year, though analysts anticipate third-quarter earnings at ad agencies to show some sequential improvement.

Europe's Publicis Groupe SA, the first of the major agency holding companies to report quarterly results, registered a 9.1% decline in revenue to $2.34 billion for the period ended Sept.30, with organic revenue off 5.6%, versus a 13.0% decrease in the second quarter. Analysts predict a similar story for U.S.-based Interpublic Group of Cos. Inc. and Omnicom Group Inc., which have yet to report September results. The ad market is generally expected to report smaller declines for the balance of the year before returning to growth in 2021.

Natalie Colakides, an analyst at Kagan, a media research group within S&P Global Market Intelligence, noted that the pandemic's impact has been uneven across ad categories. Notable downturns in ad spending among auto manufacturers and across travel have been somewhat offset by spending on consumer packaged goods and tech marketing, she said.

Colakides said she expects the ad agency holding companies will report that their U.S. operations benefited from the presidential election cycle and the return of live sports in the third quarter. However, the analyst noted the shift of ad budgets for postponed events, including the Tokyo Olympics, which is now slated for next July/August.

Colakides does not anticipate year-over-year growth in September quarter results for the ad holding companies in any region, but the analyst does predict sequential improvement from the June quarter.

Interpublic forecasts

JP Morgan analyst Alexia Quadrani in a research note wrote that the market outlook is somewhat improved from July when Interpublic reported its second-quarter results. JP Morgan is now predicting the company's organic revenue will fall 7% year over year for both the third and fourth quarters, compared to a predicted decline of 9.5% and 8.5% previously. That would mean a decline of 6% for the full year, compared with the firm's prior forecast of a 7% fall.

Quadrani expects Interpublic's U.S. organic performance to continue to outpace international due to a higher concentration of U.S. healthcare clients.

Wells Fargo analyst Steven Cahall in a note also pointed to the holding company's strength with healthcare, raising Interpublic's U.S. third-quarter organic estimate to a decline of 7%, from 8%. Internationally, Cahall views certain markets as challenging, predicting a decline of 11%, compared to 13% previously.

During the second quarter, each of Interpublic's six operating regions sustained a revenue hit owing to the pandemic. In its primary U.S. market, revenues declined 17.9% to $1.31 billion from $1.60 billion in the second quarter of 2019.

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Omnicom outlook

The analysts also foresee sequential organic revenue improvement at Omnicom, while still predicting declines. In North America, Cahall is estimating a 14.8% decline during the third quarter, versus a 21.2% drop in the second quarter. International also could improve sequentially, to a decline of 16.8%. Wells Fargo's total organic revenue estimate predicts a decline of 15.6% for the third quarter.

JP Morgan is projecting Omnicom's organic performance will fall 12.5% in the third quarter, compared to a fall of 16.0% in the second. Conversely, the firm has lowered its fourth-quarter forecast to a decline of 10% from 8%, owing to some uncertainty around year-end spending. Overall, JP Morgan's full-year 2020 organic forecast for Omnicom has slightly improved, predicting a decline of 11.4%, versus 11.7% earlier.

During the second quarter, all Omnicom operating regions sustained revenue declines in face of the pandemic. In North America, its largest region, revenue tumbled 21.5% to $1.66 billion from $2.12 billion in the second quarter of 2019.

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Looking ahead

While Colakides would welcome any guidance during the upcoming earnings calls, the Kagan analyst does not expect any specificity to emerge until January, when the companies recap their 2020 performance.

Quadrani concurs, noting that guidance will be somewhat guarded right now given the uncertainty about how consumers — and by extension, marketers — will approach the holiday spending period.

Still, JP Morgan expects growth to resume in 2021 as "macro conditions improve and advertisers find a more normal schedule of sports and entertainment programming."

Cahall is not so sure, noting the pandemic's resurgence in some regions and how its trajectory clouds the economic outlook.

CFRA analyst Tuna Amobi estimates Interpublic's full-year revenue will decline 8.9% to $7.86 billion, amid the virus's negative impact on its core advertising and digital services, public relations, events, and sports marketing businesses. Amobi's assessment assumes a mid- to high single-digit decline in organic revenue.

As to Omnicom, Amobi, who anticipates a high single to low double-digit decline in organic revenue, foresees a 12.3% decrease to $13.11 billion in its 2020 revenues.

Looking to 2021, Amobi expects Interpublic and Omnicom will report revenue growth rates of 5.5% and 7.7%, respectively.

According to MAGNA Global's Ad Forecasts, North America's net advertising spend is projected to decline by 4.4% this year. Globally, growth is expected to fall 7.2%, with Western Europe experiencing the biggest fall (down 10.3%), similar to the decline seen in 2009 following the financial crisis.

Magna Global's forecasts, published in June, show that all regions will return to growth by 2021, with a 6.1% global advance overall.