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Omnicom's Q4'17 revenue dips behind decreased project spending in the US

Omnicom Group Inc. sustained a worldwide revenue decrease of 1.5% in the fourth quarter of 2017, as results in North America declined behind reductions in client project spending, particularly in the U.S.

Omnicom President and CEO John Wren told analysts on the agency holding company’s Feb. 15 earnings call that organic growth for the fourth quarter was 1.6%, below expectations. That figure was down 0.8% in North America, which is the largest regional contributor to its business mix.

Wren said "quite a bit of project work" occurs in the fourth quarter that impacts revenue, with client spending on such activities typically concentrated in the U.S. "In the fourth quarter, our agencies only saw a partial benefit from this year-end product spend, which has historically been in the range of $200 million to $250 million," he said.

Wren also noted there was 1.2% organic growth for advertising and media in the fourth quarter, a performance weighed down by dynamics in North America. He said that several of the company's U.S. agencies, in particular its independent brands, "experienced client losses earlier in 2017 that are still cycling through and will continue to do in the first part of 2018."

For the full year, Wren said Omnicom achieved the lower end of its organic growth target of 3.0% in 2017. The company executive said the industry continues to be challenged in a number of areas, including shareholder activism and technology, which is leading to disruption about what is the "perfect way to reach" consumers today.

As to 2018, Omnicom anticipates an organic advance of 2% to 3%, with growth in the U.S. and around the world materializing behind increased spending later in the year, with "clients addressing the needs and requirements of the consumer."

In the U.S., spending will be stimulated by the recent changes to U.S. tax laws, resulting in consumers finding "more in their paychecks, while tax cuts fuel other activities," Wren said.

Wren said fourth-quarter results were also hit by the absence of political ad spending, which boosted results in the year-earlier period. With a mid-term election on tap for 2018, the company anticipates gains here during the latter part of the year.

Wren believes that account wins will also boost Omnicom's fiscal fortunes over the course of 2018. "As we sit here today, there's probably $15 billion worth of accounts that are in review, of which I think, we're at risk defending about $2 billion of that," he said. "The rest of it is an opportunity for us to win our fair share and that should contribute to our overall growth."

Consolidated revenue for the fourth quarter ended Dec. 31, 2017, was $4.18 billion, down 1.5% year over year from $4.24 billion.

A scorecard for the various Omnicom disciples indicated that healthcare declined 1.9% in the fourth quarter, while advertising increased 1.2%, public relations inched up 0.1% and CRM consumer experience and CRM execution and support were both ahead 3.4%.

Looking at organic growth by region showed that Omnicom registered an 8.2% advance in Euro markets and other Europe, a 6.0% increase in Asia-Pacific and 1.9% amelioration in the Middle East and Africa. North America was off 0.8%, while the United Kingdom and Latin America saw decreases of 0.7% and 0.3%, respectively.

Omnicom reported a year-over-year drop in fourth-quarter 2017 net income attributable to the company to $254.4 million, or $1.09 per share, from net income of $350.3 million, or $1.47 per share.

In the fourth quarter of 2017, the company recorded the net increase of $106.3 million in income tax expense, stemming from tax reform. Excluding the additional tax expense, net income increased $10.4 million, or 3.0%, to $360.7 million.

The S&P Capital IQ consensus EPS estimate for the fourth quarter was $1.54 on a normalized basis and $1.53 on a GAAP basis.

During 2017 worldwide revenue dipped 0.9% to $15.27 billion from $15.42 billion in 2016. The top line was shaped by the positive impact of foreign exchange rate of 0.3%, a decrease in acquisition revenue, net of disposition revenue of 4.2%, and the aforementioned 3.0% increase in organic growth, versus 2016.

For the full year, Omnicom reported net income attributable to the company of $1.09 billion, or $4.65 per share, down from $1.15 billion, or $4.78 per share in 2016.

Excluding the additional net income tax expense of $106.3 million recorded in the fourth quarter from tax reform legislation, net income in 2017 increased 4% to $1.19 billion.

The S&P Capital IQ consensus EPS estimate for 2017 was $5.10 and $5.07 on a normalized and GAAP basis, respectively.