Omnicom Group Inc. (OMC) posted another strong quarter with year-over-year increases of 5.4% and 5.5% in net income and revenue base, respectively, for the third quarter of fiscal 2010.
During the quarter, net income grew 5.4% year over year to $174.6 million from $165.6 million in the third quarter of fiscal 2009. EPS also stretched by 4 cents from 53 cents in the year-ago quarter to 57 cents in the reported quarter. Reported EPS coincided with the Zacks Consensus Estimate of 57 cents.
Total revenue was $2,994.6 million, representing an increase of 5.5% year over year from $2,837.6 million in the corresponding quarter of previous year. Revenue marginally beat the Zacks Consensus Estimate of $2,963.0 million. Omnicom recorded a 6.7% organic growth. Domestic and International revenue rose 8.4% and 2.3% to reach $1,617.1 million and $1,377.5 million, respectively. The increase was attributable to the general business environment, which continues to stabilize and improve.
Omnicom generated approximately 44.5% of revenue from Traditional Media Advertising, 37.0% from CRM, 9.3% from Public Relations and the remaining 9.2% from Specialty Communications. Revenue by discipline grew in all categories: Advertising increased 6.1% year over year, CRM 4.7%, Public Relations 5.1%, and Specialty Communications increased 6.3%.
Geographically, 54.0% of total revenue was contributed by the U.S., 18.4% came from the European markets, 9.1% from U.K. and 18.5% from other locations.
Although, operating expenses increased 5.3% year over year, as a percentage of revenues, it reduced 20 basis points to 88.9% from 89.1% in the third quarter of fiscal 2009. Operating income grew 6.5% to $314.1 million, which resulted in an operating margin of about 10.5%, up 10 basis points compared with the last year.
Omnicom reported a decrease in net debt compared with the previous quarter as well as the third quarter of fiscal 2009. At the end of the quarter, net debt was $1.5 billion, down from $1.7 billion in the previous quarter and $1.8 billion at the end of the third quarter of the previous year driven by the huge inflow of cash raised by issuing senior notes.
Omnicom has improved coordination between the diverse advertising and marketing strategies of its global customers, which should augment cross-selling opportunities across its businesses.
Despite the current challenging economic environment, Omnicom continues to generate new business wins and has acquired complementary companies to expand its client base. In response to the current economic challenges, management has aligned the company’s cost structure by right-sizing headcount and reducing compensation pools, which will show long-term results.
However, an intensely competitive advertising environment and pricing pressures might have a negative impact on operating margins. Thus, our long-term recommendation for the stock remains Neutral, in line with the Zacks #3 Rank, which implies a short-term recommendation of Hold.
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