Agencies and Principal-Based Trading: New Omnicom Disclosures Help Industry Analysis
I’ve long been interested in the issue of principal-based trading in agencies and the differences in accounting choices that we see from different agency holding companies in association with the practice. The trading issue is important because it is an important potential or actual source of growth for agencies and increasingly represents an active choice marketers are making, which everyone should want to understand better. The accounting issue is important because much of the analysis we see of the industry fails to correctly identify that revenue, organic revenue and margins are not comparable across the group of agency holding companies without appropriate adjustments.
Following on a new disclosure provided during Omnicom’s most recent earnings release breaking-out third-party service costs which relate to supplier costs when Omnicom acts as principal in providing services to its clients (which I analyzed here) we received some incremental information during the JP Morgan Global Technology, Media and Communications conference on Wednesday.
In response to a question, Omnicom’s CFO remarked that their media business accounts for “about half” of the service cost figure. This means that we can infer approximately $320 million in costs were incurred for media in association with principal-based trading during the quarter. We can further infer that perhaps around $1.3 billion in annualized costs was associated with the purchase of media for resale to clients last year. But how much revenue does this relate to? It’s hard to say. If media costs amount to 60% of the revenue that Omnicom books, then we could calculate that they record around $2 billion in gross revenue and client billings from principal-based trading. But if those media costs amount to 40% it would mean $3 billion instead.
To help triangulate, I can look at revenue per employee at Omnicom and compare that figure to similar numbers from other holding companies. During the 2008-2017 period, Omnicom’s global revenues ranged from 26% to 38% higher than their four most comparable peers, which each reported revenues per employee within a relatively narrow band. At the time, Omnicom had a wider array of principal-based businesses, including Sellbytel, Novus and Icon, which have since been divested, but would have elevated revenues much more than is the case at present. However, comparing the most recent disclosures for Omnicom’s US business vs. North American businesses at WPP and Havas (to limit the difficulty comparing companies with different geographic or business mixes) I can still see an approximate 20% gap. If I apply that figure against Omnicom’s reported $14 billion in gross revenue last year, this would imply that total principal-based revenue could be almost $3 billion. If we assume approximately $1.3 billion of principal-based costs were conventional pass-throughs (such as costs associated with managing events with third-parties on clients’ behalf and then billing the entire amount to the client without a mark-up) then we’d back to around $2 billion in media-related principal-based trading revenue.
For reference, Comvergence estimated in 2021 that Omnicom’s media business had $38 billion in billings, and so it’s safe to assume Omnicom had more than $40 billion in billings last year. Using the figures above imply that explicitly principal-based trading accounts for around 5% of total client billings.
As I have noted previously, the other important point of analysis is that a reduction of revenue to Omnicom makes it smaller – closer in size to Interpublic rather than to Publicis or WPP but results in EBIT margins above 18% rather than the 15% the company reported last year against gross revenue, and likely representing an industry-leading figure among publicly held global agency groups.