Client Cutbacks Hurt Omnicom Earnings, Too

Holding Company Reports Quarterly Net Income Down 24%, Joins Publicis in Predicting Worst Is Over

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NEW YORK ( -- In their quarterly earnings reports today, two of the largest ad-agency holding companies demonstrated the severe impact client cutbacks are having and declared that the global economic freefall has likely reached a bottom.

Omnicom CEO John Wren said today that the drops in both profits and organic growth were greater than the company anticipated.
Omnicom CEO John Wren said today that the drops in both profits and organic growth were greater than the company anticipated.
Omnicom Group reported a 24% drop-off in net income to $233 million, compared with $307 million in the second quarter of 2008, and a 10.8% slide in organic growth. That came just hours after Publicis Groupe announced its global organic revenue was down 8.6% for the quarter.

Omnicom CEO John Wren told the media and analysts today on a conference call that the drops in both profits and organic growth were greater than the company anticipated. Global revenue also dropped significantly, by 17.4% to $2.8 billion from $3.5 billion in the same quarter last year.

The falloff in organic growth, which was about $50 million more than anticipated, was fueled by a lack of business in areas including automotive (down 30%, or $105 million), events and sports marketing (down almost 40%, or $65 million), and not-for-profit (down 40%).

"Automotive was down in part because of the reduction caused by the Chrysler bankruptcy, although we did see declines in all of our automotive clients' spending," Mr. Wren said.

Omnicom's BBDO was left holding the bag for $58.1 million when Chrysler filed for bankruptcy. Randall Weisenburger, exec VP-chief financial officer at Omnicom, said if the turnaround for the auto sector occurs, it will be some time next year or later.

"I don't see the auto sector rebounding quickly in the second half. I hope I'm wrong, but I don't see any reports that [indicate otherwise] and it doesn't seem like the auto companies think it will," Mr. Weisenburger said.

But he said he believes the second quarter may have been the overall bottom. "With the new-business successes we had in the first half of the year and end of last year, we will start seeing that come through in the second half of this year," he said. "That gives us a bit of confidence that the second quarter is probably the low point."

And while Mr. Wren didn't acknowledge any specific agency for a strong performance during the quarter, he said all Omnicom's agencies have managed to adjust to the current economic environment.

"Our agencies have done an excellent job adjusting to the reset in the economic environment and are well-positioned for any turnaround in the economy when it comes," he said.

Mr. Wren added that he felt there would be good opportunity for new-business growth in the near future. "I'm encouraged by discussions I have had with major global advertisers over the past six to eight weeks, and I expect that new business opportunities will exceed prior-year activity."

Omnicom's ad agencies saw the smallest decline in business, at 15.5%, similar to its first-quarter results. The group's public-relations division had its fourth consecutive quarter of negative growth, dropping 18.5% this time around, while customer-relationship management fell 18.7%, due in large part to the poor performance of the events and sports marketing and not-for-profit businesses, without which CRM would have been down only 8%. Its specialty business, which includes its media, recruitment-advertising and health-care businesses, had the biggest drop, with 20.1%.

On client-fee negotiations, Mr. Wren said there are always negotiations going on with some client in Omnicom's roster of 5,000, but most of those conversations occurred in first four months of the year. "We have adjusted in many instances not only the fees but the scope of work we have to perform against those fees. I believe most of those [conversations] are finished," Mr. Wren said.

The company had $938 million in new-business billings for the second quarter. In terms of acquisitions, Mr. Weisenburger said Omnicom is well-positioned for any "sensibly priced acquisition" opportunities that might arise. "If we can find acquisitions that are fairly priced that fit well with our existing businesses and client base, we're more than interested," he said.

Mr. Weisenburger said it looks as if Omnicom's agencies have gone through the bulk of the necessary changes, and that project activity "hit a low point in the first half of the year, and there are now opportunities for recovery -- not a lot, but a bit of recovery, certainly not getting any worse in the second half."

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