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Omnicom Underwhelms With Soft Organic Growth

Omnicom Group (NYSE: OMC) announced mixed second-quarter 2018 results relative to expectations on Tuesday morning. The marketing communications specialist highlighted solid profitability and organic growth across most of its industry disciplines, but also a troublesome revenue decline from its core North American market.

With shares down more than 9% in response, let's take a closer look at what Omnicom had to say as it enters the second half of the year.

IMAGE SOURCE: GETTY IMAGES.

Omnicom Group results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Growth

Revenue

$3,859.6 million

$3,790.1 million

1.8%

Net income (available for common shares)

$364.2 million

$328.6 million

10.8%

Net income per common share (diluted)

$1.60

$1.40

14.3%

DATA SOURCE: OMNICOM GROUP.

What happened with Omnicom this quarter?

  • Omnicom doesn't offer specific quarterly financial guidance. But analysts, on average, were anticipating earnings of only $1.55 per share on higher revenue of $3.90 billion.
  • Revenue was reduced by $49 million, or 1.3%, because of Omnicom's adoption of ASC 606 accounting standards at the start of the year.
  • The remaining top-line increase consisted of 2% organic growth -- near the low end of management's stated annual expectation for a range of 2% to 3% -- a 2.1% contribution from foreign exchange rates, and a 1% decrease in acquisition revenue (net of dispositions).
  • On a geographic basis, organic revenue grew 11.2% in the Euro markets and other Europe, 8.5% in Asia-Pacific, and 2.5% in Latin America. That growth was partially offset by declines of 2.9% in North America -- where, for perspective, the company generated nearly 57% of total sales last year -- 2.2% in the U.K., and 8% in the Middle East and Africa.
  • By "fundamental discipline," advertising revenue grew 1.6%, CRM Customer Experience revenue increased 7.1%, Public Relations revenue climbed 2.7%, Healthcare jumped 4.8%, and CRM Execution and Support sales declined 4.4%.
  • Quarterly EBITDA increased 1.6% to $609.3 million.
  • Omnicom Health Group acquired the pharmaceutical communications business of Elsevier in Japan during the quarter. The acquired business will operate under Omnicom's EMC subsidiary as EMC K.K. going forward.
  • Omnicom also recently entered into a definitive agreement to divest Sellbytel Group to Webhelp Group. The transaction is still subject to regulatory approval, but should close in the third quarter.

What management had to say

During the subsequent conference call, Omnicom CEO John Wren called it a "good" quarter, noting that organic growth was achieved in nearly every area of the portfolio. He also reminded investors that Omnicom is continuously evaluating its portfolio to align its capabilities with its strategic plans -- hence its impending disposition of Sellbytel.

In North America, Wren noted that Omnicom's perforamnce was weighed down by the lagging CRM Execution & Support discipline, advertising and media client losses in prior periods, reductions in scope, and changes in the way certain clients are purchasing media in the programmatic advertising space. Still, he also suggested that the latter "trend is slowing," and the company sees its negative impact abating in the second half of this year.

Looking forward

Assuming foreign exchange rates hold steady, Omnicom CFO Phil Angelastro anticipates currencies will have a negative impact on revenue for the remainder of the year, including a roughly 1% headwind for both the third and fourth quarters. Meanwhile, Omnicom expects the impact of recent acquisitions, net of dispositions, will reduce revenue by roughly $38 million, or 1% in the third quarter.

In the end, and contrary to what today's steep decline might indicate, I tend to agree that this was a "good" -- but not great -- quarter from Omnicom. But given its top-line miss relative to estimates, and with shares having rebounded around 13% from its 52-week low set late last year, it's no surprise to see the stock plunging today.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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