Omnicom's 2Q23 Results: Growth Decelerates, Principal-Based Trading Leads
Omnicom reported its second quarter 2023 results on Tuesday. Headline organic growth results included a 3.4% organic growth rate and a headline adjusted 15.6% EBITA margin (down from 15.8% in 2Q22). This represented a slowdown from 1Q23’s 5.2% rate of growth, although it is worth noting that comparables for Omnicom were difficult given the 11.3% growth rate reported in the year-ago period. Guidance remains in effect with a range of 3-5% growth for the year, although multiple references to clients seeking “flexibility” highlighted the ongoing uncertainty that many companies in the industry experience at the present time.
As the company reports revenues differently than every other major agency group – focusing on gross revenue, rather than net, which excludes pass-throughs – results are not directly comparable to peers, so further analysis is required to interpret their numbers. Excluding the 23% of Omnicom’s “revenue” that are essentially pass-throughs, adjusted margins actually rose from 20.1% to 20.4% during the quarter over last year, and likely remain the highest in the industry on a comparable basis. Organic growth is much harder to comparably calculate, as the company does not disclose pass-throughs in organic terms. However, if we excluded all third party costs, the calculated growth rate for organic growth would be only 1.5%, following on the first quarter’s equivalent 4.1% rate. To be sure, the revenue growth that comes from pass-throughs is real, and undoubtedly contributes to business wins, absolute profit margins and cashflows. As the principal-based trading activity that drives the growing volumes of pass-throughs is set to amount to $3-4 billion in 2023 and llikely has significantly higher (perhaps 30%+?) margins, it should not be discounted. However, for purposes of analysis and comparison with other companies in the sector, the accounting choice needs to be considered.
Looking at the individual business segments, advertising & media, which represents around half of the business and includes Omnicom’s flagship media and creative agencies, rose organically by 5.1% in the quarter, although as implied above, the bulk of this growth would have been due to pass-through-driven activity. Precision Marketing, which includes digital and direct marketing, digital transformation consulting as well as data and analytics businesses (agencies such as Critical Mass, RAPP, and Organic) grew below the overall average at 2.3%, although it did so against a very difficult 21.0% comparable from the year-ago period. Commerce and Brand Consulting similarly grew only slightly more than 2% despite a double digit growth rate in 2Q22. Although relatively small with less than 10% of the company’s business, experiential agencies were strong, rising by 9.2% organically (although this, too would likely be a part of the business to benefit from the inclusion of pass-throughs). The one segment that was negative in the quarter was “Execution & Support” (which includes field marketing, sales support, merchandising, point-of-sale and product placement businesses) which fell organically by 3.8%.
Most regions followed similar trends that mapped the overall company’s organic growth with the exception of APAC, which accelerated to 7.5% year-over-year organic growth in the quarter form 2.8% in the first quarter. China was cited multiple times as a key driver of growth against easy comparables for different business units, despite tepid economic conditions there. However, the country’s revenue base is likely small in absolute terms for Omnicom – it represented around 1.5% of the company’s total in 2019 and likely remains at a low single digit share.