Inside the Q4 Earnings

NEW YORK Last week comparisons couldn't help being made between the fourth-quarter fates of the industry's second-largest player, Omnicom, and Publicis, behind it at No. 3. On Tuesday, Omnicom CEO John Wren, describing 2008's final quarter as the most-difficult period since 1992, said the company posted its first drop in net income in recent memory. A day later, Publicis CEO Maurice Levy said his business had still been growing amid the global meltdown. (Click here to read a Q&A with Maurice Levy.)To be sure, the strengthening dollar hit Omnicom's bottom line even as it benefited Publicis' numbers. But the French holding company was still able to eke out 1.1 percent organic growth -- a measure that strips away currency fluctuations -- while its larger American rival posted a drop of 14 percent in net income in the quarter.Aside from a stronger dollar, Omnicom cited a loss of year-end project work, primarily from its U.S. operations. Publicis, which derives a larger share of its revenue from digital and emerging economies, said those businesses helped to offset weaknesses elsewhere. Publicis' revenue in the quarter climbed 5.5 percent compared to Omnicom's decline of 7 percent.Geography and technology certainly appeared to have worked in Publicis' favor in the fourth quarter. Omnicom derives nearly half of its revenue from the U.S. while Publicis rings up 43 percent. "In a normal year, a couple of hundred million of revenue comes in as unbudgeted project work," said Randy Weisenberger, Omnicom's CFO. "You're always nervous because you can't forecast it and you hold your breath till it comes in. Last year, we were more nervous than usual and it didn't come in."Deutsche Bank's Matt Chesler noted that Omnicom has more exposure in the U.S. to PR and speciality communications. For example, revenue at Omnicom's Bernard Hodes Group -- the country's largest recruitment company -- plummeted by almost a third. But Omnicom's CRM operations grew 3 percent, excluding the impact of currency.Levy has been investing heavily in his digital businesses, which now account for 19 percent of Publicis' revenue, and in emerging markets, which contribute almost 23 percent and grew at a 14.2 percent clip in the quarter. For Omnicom, revenue from emerging economies accounts for about 8-10 percent. The company does not break out digital revenue as it is primarily incorporated into its agency operating units.For all of 2008, Publicis reported a 1 percent drop in net income on flat revenue, but beat the odds and maintained a 16.7 percent margin. According to research from ING in Paris, that was way above the company's expectations of 16.4 percent. The research also confirmed that the management remains on top of events and that adequate measures were taken to fight the nasty economy in the Q4.But even Levy conceded that might be a difficult feat to achieve for a third year running. "We may face some margin erosion this year," he said. "It very much depends on the situation in the marketplace."In such an unpredictable economy, controlling costs may be the only way to uphold profitability. In 2008, Omnicom incurred $55 million in severance costs, year over year, but stands to gain $215 million in savings as a result. What's more, 5-6 percent of Omnicom's costs are linked to highly variable incentive compensation. A 4-5 percent reduction in 2009 organic gross in revenue could translate into a 40-50 percent reduction in senior exec pay. Omnicom still outperformed analyst estimates for the quarter and posted a 2.5 percent increase in 2008 net income. Still, the quarterly drop was a sign of the times at a company that has not reported a down year since it was formed in 1986.Neither Publicis nor Omnicom is offering investors full-year 2009 guidance. Richard Houbron, with Natixis Securities, said Publicis' "excellent cost control in 2008 [makes] the group ... well armed to face the future." And despite Standard & Poor's Rating Services placing a Creditwatch on Omnicom's long-term ratings last week, some observers like JPMorgan's Alexia Quadrani expects it to "preserve profitability" amid current uncertainty, thanks to its "diversified revenue stream, high-quality networks...and variable cost structure."

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Inside the Q4 Earnings

Noreen O'Leary

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Noreen O'Leary