Release Date: April 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Omnicom Group Inc (OMC, Financial) reported a solid start to the year with organic growth in the first quarter at 4%.
- EBITA margin was 13.8% for the quarter, with a strong performance in advertising, media, and precision marketing disciplines.
- Non-GAAP adjusted earnings per share increased to $1.67, up 3.7% versus Q1 2023.
- Full-year organic growth range increased to between 4% and 5% due to strong first-quarter performance.
- The acquisition of Flywheel is off to a great start, with integration into Omni providing comprehensive data sets in the industry.
Negative Points
- Public Relations declined by 1.1% in the quarter, expected to improve later in the year.
- Branding and retail commerce declined by 3.8%, facing a challenging environment and difficult comparison to Q1 2023.
- Execution and Support declined by 4.3%, with mixed results overshadowing continued strength in field marketing.
- The impact of foreign currency was relatively flat, decreasing reported revenue by 0.1%.
- Flywheel's integration costs and lower margins are expected to impact Omnicom's margins until Q4, where it is expected to align with Omnicom's average margins.
Q & A Highlights
Q: What is the potential value of the Flywheel acquisition both from a short-term and long-term perspective, and the expected margin impact this year and over the long term?
A: (John Wren - CEO) Flywheel is significant as it is the only fully integrated retail commerce cloud platform available, offering extensive knowledge and information about online e-commerce transactions globally. It allows Omnicom to connect the Commerce Cloud with Omni Assist, enabling end-to-end capabilities from brand building to the actual sale in a local e-commerce environment. Flywheel is expected to grow with the e-commerce market, which is forecasted to expand exponentially. The integration of Flywheel into Omnicom's operations is going well, and margins are expected to approximate Omnicom's average margins by Q4 of this year, with the overall results being accretive, excluding amortization, also by Q4. Longer term, Flywheel is expected to be accretive to Omnicom's overall average margins. (Philip Angelastro - CFO)
Q: Are there any other specific types of strategic acquisitions Omnicom is focused on in the near term?
A: (John Wren - CEO) Omnicom is focused on areas showing exceptional growth, such as MarTech, transformation, and content production. The company is looking for opportunities that geographically fill out services and also from a capability point of view. However, there are no plans for acquisitions of the same magnitude as Flywheel at the moment.
Q: What is the medium-term growth potential for the Precision Marketing segment now that Flywheel has been integrated?
A: (John Wren - CEO) The forecast for the Precision Marketing segment, which now includes Flywheel, is low double-digit growth. This is subject to opportunities and market growth, and it is included in the overall guidance of 4% to 5% organic growth.
Q: Would the group adjusted EBITA margin have been up without Flywheel?
A: (Philip Angelastro - CFO) There are many moving parts to operating profit and margin, and Flywheel's margins are lower than Omnicom's average margin. There are also integration costs in the first quarter. The exact impact of Flywheel on EBITDA margins wasn't calculated, but the difference is not significant, and margins would likely have been close to flat without Flywheel.
Q: What was the difference between the 9% growth in Q4 and the 7% in Q1 for Advertising and Media?
A: (John Wren - CEO) The growth in the Advertising and Media group has been strong for the last two years every quarter. Any particular quarter is up against difficult comps, and the group is expected to continue to grow throughout the year. (Philip Angelastro - CFO) A decline from 9% to 7% growth is not concerning, and Q1 often takes a step down from Q4 historically due to project spend.
Q: What prompted the decision to raise guidance, and what is the outlook for Precision Marketing in 2024?
A: (John Wren - CEO) The decision to raise guidance was based on the first quarter coming in at 4%, which justified removing the bottom end caution of 3.5%. Confidence is growing as new business activity looks promising, and Omnicom is defending very little while having opportunities on several big brand names. (Philip Angelastro - CFO) Flywheel's performance is weighted towards the end of the year, and growth is expected to improve as the year goes on.
Q: What is Omnicom's organic growth calculation, and when does Flywheel become part of reported growth?
A: (Philip Angelastro - CFO) Omnicom includes acquisitions in the organic growth calculation from the time of acquisition. The acquisition revenue reflects the prior year's revenue used to determine growth based on the current year's revenue. Flywheel's organic growth is included in the calculation, and after 12 months, there's no more acquired revenue from the company; it's all organic.
Q: With the removal of the lower end of the guidance range, is the year off to a stronger start in terms of client activity?
A: (John Wren - CEO) Things are performing in line with expectations, and there is better client activity than expected early on. The creative part of the business was roughly flat this quarter, but it is expected to improve throughout the year. (Philip Angelastro - CFO) Creative is core to Omnicom, and while it goes beyond advertising, it is adapting to new ways of working and technology.
Q: Can you discuss the impact of generative AI on the creative side and the capital intensity of Flywheel?
A: (John Wren - CEO) Generative AI empowers creative people to come up with different executions across various mediums, using Omni data and Flywheel commerce data. It benefits clients by improving ROI on marketing spend. (Paolo Yuvienco - CTO) Generative AI is seen as a partner for employees, enhancing their skills. (Philip Angelastro - CFO) Flywheel's CapEx commitment is similar to the Omni platform, with an increase expected but manageable due to prior integration work.
Q: Does the Flywheel acquisition change the outlook for Omnicom's potential to accelerate organic revenue growth?
A: (John Wren - CEO) The cleaned-up portfolio and market-leading products and offerings provide confidence in sustaining organic growth. Omnicom's management teams are executing and delivering products worldwide, contributing to a positive outlook.
Q: What are the factors holding back margin growth for this year?
A: (Philip Angelastro - CFO) The approach to margins involves balancing sustainable business growth, making appropriate investments, and providing returns to shareholders. Factors include the integration of Flywheel, continued investments in Omni and Flywheel Commerce Cloud, and benefits from cost structure flexibility.
