A close look at Omnicom's third quarter earnings and the agency holding company's conference call offer some worrying data points of you're an employee at one of CEO John Wren's agencies: The boss says you're a flexible expense who could be cut.
Let's examine what was said back on Oct. 21, when the numbers came out and Wren (pictured) and his CFO, Randall Weisenburger, had their quarterly fireside chat with Wall Street.
Omnicom's revenue was up to $3.3 billion. Not bad, but the net income margin at the company is 6 percent. Not too much room for maneuver in an environment where ad budgets are being cut. Of that $3.3 billion, $2.9 billion disappeared immediately on operating expenses -- a giant chunk of that is your salaries, dear readers.
Wren: No one could have anticipated the current credit crisis or the unprecedented volatility that's created in the financial markets. We are in the process of trying to assess the impact these events we have on advertising spending for the first half of 2009.Did he really say that? People were "anticipating" a credit crisis as far back as August 2007. Wren must be the only guy on the planet who didn't see Jim Kramer's "Ben Bernanke has NO IDEA!" video.
Wren: At this point, our clients generally remain very cautious. The only two sectors which have cut back in fourth quarter spending are automotive and some of our retail clients.So, er, those would be your biggest clients, yeh?
Wren: As many of you know, as in past recessions offsetting part of the uncertainty in revenue is a flexibility we have in our cost structure. ... Longer term, as we've always done, we'll adjust our cost structures to reflect our best estimates of revenues going forward.
CFO Weisenburger: Our agency management teams are highly focused on managing their staffing levels and creating as much flexibility as possible in their cost structures to better manage through whatever economic conditions develop.Translation: Our major "cost" is staffing costs. To the extent that we can fire people, that "structure" is flexible.
Wren: We are hopeful that, this crisis will be short-termGet this man a subscription to the Wall Street Journal! No one thinks this recession is short-term.
Wren: Our incentive compensation normally runs between 20% of and 22% of pre-tax pre-incentive income. It's not all actionable. We can take it down if we must.Don't count on your bonus. If it's at all discretionary and non-contractual, it ain't happening.
Wren: If we handle it right and there is a sustained recession, it will create opportunity for us to go out and acquire talent that's available in the industry that would have under different circumstances may not have moved from where they currently are working.Translation: If you get laid off from a non-Omnicom agency, send us your resume but expect to take a pay cut. You're all cheap right now.
Another interesting tidbit from the call is that Omnicom suspended its share buyback program. Buybacks are one way for a company to return value to the shareholders who have invested in the firm. Some companies have kept them up. Not OMC:
Craig Huber [an analyst at Barclays]: Can you just give us little more flavor for why you just suspended your share buyback?
Weisenburger: It's really a matter of conservatism. Why we suspended is the conservatism with respect to overall capital markets. Obviously there was pretty significant deterioration in capital markets as we went through the quarter. We didn't want to create any additional stress than we needed to on our bank groups or anybody else out there. ... We won't resume until the financial markets stabilize.
Wren: And in the near term cash is king.So let's take a look at Omnicom's cash. It has $8.3 billion in cash and cash-like assets on its balance sheet. That's 48% of its total assets. But $7.4 billion of its assets are "goodwill" -- a pretty intangible asset that tends to disappear quickly in a recession.
The more interesting number is on the bottom line of OMC's cashflow statement: The company lost $1.3 billion in cash last quarter, mostly from its stock buyback program. It only gained $213 million in net income on an accrual basis. I won't bore you with the technicalities of how OMC showed a loss on one page and a profit on the other, suffice to say that barring some extraordinary event like an acquisition, most companies would rather see those numbers the other way around.
So it looks like Omnicom has gone into cash-hoarding mode. Your salary is made of cash, BTW. Don't expect Wren to keep paying you just because he likes your face.