World: Analysis - The Big Four global networks put a positive shine on 2003

Bob Willott looks at the true picture hidden behind the end-of-year financial data.

When the Big Four global groups announced their results for 2003, the first priority was to identify which of them had been most astute in the image they presented of their financial performance. Remember Sir Martin Sorrell's gloomy predictions about an ever-extending bathtub? Were these designed simply to condition us to accepting less than exciting results at WPP? And are Maurice Levy's current bullish pronouncements about the successful achievement of all of Publicis Groupe's objectives designed to draw attention away from the fact that the group is earning less per share for its investors today than two years ago?

The confusion is compounded by the different accounting rules that apply in France, the US and the UK, and by the varying impact of currency exchange rates. So even the published figures are not truly comparable. Nevertheless, it would be hard not to conclude that the volume of business done by the Big Four has increased.

The reported rise in revenues of the Big Four (billings less costs of bought-in work done for clients) was 11.3 per cent. However, if currency exchange rates had remained constant, Omnicom's revenue increase would fall from 14.4 per cent to 7.8 per cent and the increase in revenues of European groups such as WPP and Publicis would have been rather better.

And here comes the first distortion. The apparent leap in revenues at Publicis is entirely due to the fact the figures for 2002 included only about three months of Bcom3's revenue. If the full year's figures were used, the revenue fell by 9.7 per cent. Even if revenue were calculated on a constant currency basis, there would have been only a miniscule increase of 1.6 per cent.

What about profits? Again, it depends on how you measure them. As far as shareholders are concerned, they have nothing to celebrate at Publicis where post-tax profits remained almost unchanged at $170 million and earnings per share fell by 8 per cent, despite having increased revenue substantially after the purchase of Bcom3.

But both WPP and the world leader, Omnicom, brought some cheer with real improvements. Admittedly, WPP was recovering from a profit dip in 2002.

As for Interpublic, the less said about its $452 million loss, the better.

It must be one of the few companies that incur non-recurring costs, such as asset write-offs and restructuring, on a recurring annual basis.

Publicis clearly scores best when operating profit margins are compared before allowing for the amortisation or impairment of goodwill ("goodwill" being the excess of the price paid for an acquisition over the aggregate value of the individual assets and liabilities acquired). But, leaving aside goodwill, on past experience, the picture at Publicis would be rather worse if it presented its profits on a similar accounting basis to those of Omnicom and WPP.

Only WPP showed any improvement in its margins, but it still has a long way to go, even by the favourable definition of operating margin it used in its profit announcement. There, earnings from non-consolidated companies in which it has only a minority interest were included in operating profit even though their revenues were excluded. The figures in our table exclude income from associated companies. WPP recognises the need to achieve better margins, and is aiming for 13.8 per cent for 2004. "After all, the best listed performer in the industry has been at 15-16 per cent and that is where we want to be," the company says.

At Omnicom, the biggest cause of its margin decline was a disproportionate increase in staff-related expenses (including severance costs). These jumped by nearly 18 per cent whereas revenue grew by only 14.4 per cent.

As staff and related costs absorbed some two-thirds of Omnicom's revenues last year, any disproportionate increase would make a big dent in margins.

At Omnicom, that disproportionate cost increase lopped $173 million off profits and a full two percentage points off its operating margin.

So what can we conclude about the Big Four's performance in 2003? First, there are signs of an upturn in revenue. Second, profit margins have come under considerable pressure, particularly as a result of severance and excess property costs, but we are told that 2004 may show some improvement.

It will need to. Third, we should view with caution profit claims that are arrived at after excluding lots of items that the rule-makers still think are pertinent to a true measure of profit - whether related to writing-off costs of previous acquisitions or restructuring. And finally, once weakened, companies such as Interpublic (and Havas) are finding that the road to recovery is very difficult.

- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.

POST-TAX PROFIT

Network Profit after tax (dollars m) Change

2003 2002 (%)

Omnicom 675.9 643.5 5.0

WPP 340.9 143.9 136.8

Publicis 169.8 166.4 2.0

Interpublic -451.7 99.5 -554.0

Total 734.8 1,053.3 -30.2

REVENUE

Network Revenue Year-on-year

dollars m change in

constant currency

Omnicom 8,621 7.8%

WPP 6,716 7.3%

Interpublic 5,863 -2.4%

Publicis 4,373 158.3%

Total 25,573 n/a

1. If 2003 is compared with the pro forma revenues for 2002 assuming

Bcom3 had been owned throughout the period, the change would have

been -9.7 per cent (+1.6 per cent on constant currency basis)

OPERATING PROFIT MARGIN

Network Operating profit margin%1

2003 2002

Omnicom 13.5 14.7

Publicis 10.6 11.5

WPP 10.1 7.0

Interpublic 0.9 6.3

Total 9.2 10.0

Operating profit means profit from trading before charging financing

costs and taxation - as a percentage of revenues.

1. After goodwill impairment/amortisation.

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