Q3 Preview: Revenues, Not Earnings, Will Be Agencies' Key Measure - and They Will Be Down

(MoneyWatch)  As we enter the Q3 2009 earnings season, many publicly traded agency holding companies -- Interpublic, Omnicom, WPP, Publicis and MDC Partners -- will report increased "earnings" of one form or another. Their stocks may even rise on the news.

Certainly, increased profits are good. But Joe and Josephine Cubicle should ignore those numbers in favor of a much better measure of ad agency health: Old-fashioned revenues, the so-called top line.

Barring a miracle, there will be no revenue growth in Q3 at any of the major companies, if a recent analyst note from Jefferies & Co. is to be believed. Some companies may display "sequential" growth in sales, meaning that Q3 was slightly better than Q2. And that's not to be sneezed at -- that's what recoveries look like.

The more important measure is year-on-year sales. Those will all be down.

The only reason "earnings" -- meaning net income or the more nebulous "earnings before interest, taxation and depreciation" -- will be up is because agencies have laid off tens of thousands of employees. About 18,300 staff have gone from the major networks; there have been more than 37,400 layoffs in the business as a whole; and tens of thousands more in "hidden" businesses such as advertising vendor and supply shops.

An agency can remain fully profitable (indeed it can improve its profitability) as long as it can cut staff faster than its client billings decline. In theory, an agency could be profitable right up until the day it files Chapter 11. But the real gauge of the health of the business -- and whether it will start hiring again -- is revenues.

Here are J&C's revenue estimates:

• Clear Channel Outdoor: -18.8%,
• Lamar Advertising: -14.6%
• Interpublic: -18.1%
• Omnicom: -13%
• MDC Partners: - 10%

Roll on, Q4!

• Related:
• Omnicom, Interpublic Won't See Daylight on Revenues Until 2010, Say Analysts