Agency Holding Companies: Client Concentration Analysis
Weak 2Q23 results and a reduction in full year 2023 guidance for each of Interpublic and S4 Capital paired with soft results at Omnicom are not necessarily worrisome signs for the agency sector. Putting aside Publicis’ significant outperformance vs. expectations, 2Q23 was always going to be somewhat challenging for many agency groups given the difficult comparables in the year-ago quarter. I haven’t seen anything yet in results that would cause an alteration of expectations for the agency sector this year, which I outlined in a prior publication.
With that noted, one common theme in the results at IPG, Omnicom and S4 was that tech and telecom clients have been cutting their spending. Although I think ups and downs for individual categories are common enough in any given period, one thing that might be unique about technology and telecom is that so many of these companies are often individually massive, which means that big swings in spending from individual marketers can lead to outsized results up and down. For reference, although we don’t know specific drivers of spending cuts, big clients in the tech and telecom sectors at Interpublic include Amazon, Microsoft, Verizon and T-Mobile. At Omnicom it’s Apple and AT&T. At S4, Alphabet, Meta and HP are among its biggest.
While most agencies only disclose category-level data on a regular basis, I think an important way to look at the underlying issue is to consider concentration of revenue from individual advertisers. With varying degrees of specificity, these figures are included in each company’s annual reports, and in many quarterly filings, too.
To illustrate, during 2022, S4’s largest customer accounted for a massive 21% of revenue – more than $230 million USD at average exchange rates. Their #2-#7 customers accounted for a combined 18% of revenue, or an average of just under $50 million USD. Under these circumstances, one can easily see how a single marketer making an early quarter change could cause a significant swing in quarterly and full year results at a company with a gross revenue base of $1.3 billion. S4 is somewhat unique in that they have a significant number of accounts that are similar in size to those serviced by the larger agency groups vs. other similar sized agency groups where average revenues will be much lower.
For reference, At WPP, Publicis and Interpublic, there are 10 clients whose average revenues are similar in size to S4’s largest (with the WPP’s top 10 each accounting for approximately $260 million USD in revenue, on average; Publicis’ top 10 average an amount that’s closer to $280 million USD; Interpublic’s top 10 average nearly $220 million).
There are other individual marketers spending much more, of course: Omnicom discloses that its largest marketer – presumably Pepsico – accounted for nearly $400 million in gross revenue in 2022, although it’s impossible to know how much that client accounted for in net revenue terms. IPG’s biggest client was actually bigger, with nearly $440 million in gross revenue.
Importantly, concentration is, for the most part, fairly limited for agencies. At Omnicom, the top 100 customers account for 53% of gross revenue, and at Publicis the top 100 account for 53% of net revenue. For both agency groups, those marketers average just over $70 million USD in average revenue. Such a distribution of revenue is ultimately helpful in the long-run, helping to diversify risks while tempering both growth and decline for the industry’s largest participants.