High-profile marketers, from Coca-Cola Co. to Amazon.com to General Electric Co., over the past month have decided to expense options, betting the more conservative approach will help calm financial markets rocked by accounting scandals. The approach-which could become the accounting industry standard-reflects that stock options are a form of compensation expense. Bottom line: Net income goes down.
Agencies are in a good position to adapt because they're less reliant on options than are some other industries. On average, agency companies' earnings would be reduced by 7% if they expensed options, estimates Merrill Lynch analyst Lauren Rich Fine.
At Omnicom, expensing options last year would have reduced earnings per share by 23 cents to $2.47. It's a bigger issue in options-laden industries like tech and the Internet; expensing options would have taken Yahoo!'s net loss from 16 cents to $1.73, according to Bear, Stearns & Co.
Options are likely to be discussed in Omnicom's and Interpublic's earnings conference calls Aug. 6. Omnicom declined to comment about expensing options or other financial issues, citing fair-disclosure rules. An Interpublic spokesman said: "It's under discussion, and we will have a decision by year end."
WPP already has made the decision, said Paul Richardson, group finance director. "We do intend to find a way of expensing stock options through our [profit] numbers this year," he said, "and we'll make an announcement" when WPP releases first-half earnings Aug. 20.
Meanwhile, the stock market is bracing for bad news from Interpublic. The stock was driven down amid concerns Interpublic will miss second-quarter earnings estimates or issue a pessimistic second-half forecast. Havas last week, and WPP in late June, issued cautious outlooks.
Omnicom's stock recovered some ground since it cratered after a June Wall Street Journal story questioned its accounting. Bear Stearns analyst Alexia Quadrani said investors appear to be buying Omnicom's defense of its accounting, and she said the market expects Omnicom to stick with its optimistic earnings guidance. Said Ms. Fine, a long-time Omnicom proponent: "Omnicom is still the best company in this space."
Rivals remain confounded by Omnicom's ability to keep reported revenue and profits growing even amid questions about the timing and scale of an advertising recovery.