Omnicom Group Inc. (OMC) posted strong operating results for the fourth quarter and fiscal 2010.
Quarterly Highlights
During the quarter, net income grew 7.4% year over year to $244.0 million from $227.1 million in the fourth quarter of fiscal 2009. EPS also stretched by 10 cents from 73 cents in the year-ago quarter to 83 cents in the reported quarter. Reported EPS also beat the Zacks Consensus Estimate of 81 cents.
Total revenue was $3,586.8 million, representing an increase of 9.8% year over year from $3,265.9 million in the corresponding quarter of the previous year. Revenue surpassed the Zacks Consensus Estimate of $3,435.0 million. Omnicom recorded a 10.0% organic growth.
Domestic and International revenue rose 12.6% and 7.0% to reach $1,836.4 million and $1,750.4 million, respectively. The increase was attributable to the general business environment, which continues to stabilize and improve.
Omnicom generated approximately 46.6% of revenue from Traditional Media Advertising, 35.9% from CRM, 8.3% from Public Relations and the remaining 9.2% from Specialty Communications. Revenue by discipline grew in all categories: Advertising increased 11.7% year over year, CRM 6.2%, Public Relations 7.9% and Specialty Communications increased 17.2%.
Operating expenses as a percentage of revenue decreased by 10 basis points to 87.2%. Operating income grew 10.0% to $439.6 million, which resulted in an operating margin of about 12.3%, up 10 basis points compared with last year. EBITA increased 10.9% to $459.8 million and EBITA margin rose by 10 basis points to 12.8%.
Annual Highlights
During fiscal 2010, net income grew 6.7% on a yearly basis to $819.7 million from $783.9 million in fiscal 2009. EPS increased to $2.70 from $2.53 in the previous year. However, reported EPS coincided with the Zacks Consensus Estimate of $2.70.
Total revenue was $12,542.5 million, an increase of 7.0% from $11,720.7 million in the previous year. Revenue marginally beat the Zacks Consensus Estimate of $12,391.0 million. Organic revenue growth was 6.4%. Domestic and International revenue rose 8.2% and 5.7% to reach $6,683.1 million and $5,859.4 million, respectively.
During the full year Omnicom generated approximately 45.3% of revenue from Traditional Media Advertising, 36.3% from CRM, 9.1% from Public Relations and the remaining 9.3% from Specialty Communications. Revenue by discipline grew in all categories: Advertising increased 7.1% year over year, CRM 6.5%, Public 6.5%, and Specialty Communications increased 9.2%.
Geographically, 53.3% of total revenue was contributed by the U.S., 19.6% came from Continental Europe, 8.7% from U.K. and 18.4% from other locations.
Operating expenses as a percentage of revenue remained stagnant at 87.8% while operating margin fell by 10 basis points to 11.6%. However, operating income grew 6.2% year over year to $1,460.2 million. EBITA increased 7.0% to $1.531.0 million and EBITA margin remained the same at 12.2%.
At the end of fiscal 2010, net debt was $900 million, a decrease from $1.5 billion at the end of third quarter of fiscal 2010, but an increase from $663.0 million at the end of fiscal 2009. Free cash flow marginally decreased to $1,024.0 million from $1,036.6 million in fiscal 2009 based on higher capex in fiscal 2010.
Omnicom’s key growth strategy is to enhance its client’s base, which is its major focus. Further, Omnicom also has a strategy to acquire complementary companies with strong entrepreneurial management teams to expand its client base. Moreover, markets are picking up and the improving economic conditions should benefit Omnicom as they help increase consumer spending.
However, this huge dependence on clients is risky as the loss of a client or reduction in client spending could adversely affect the company’s results. An intensely competitive advertising environment and pricing pressures remain causes of concern.
Omnicom’s direct competitors are Interpublic Group of Companies Inc. (IPG) and WPP plc (WPPGY). However, management remains committed to expanding its business and relationships in Asia, where operating conditions remain extremely favorable. This should improve the long-term profitability of the company.
Hence, we maintain our Neutral recommendation and the stock also currently retains its short term “Hold” rating (Zacks #3 Rank).
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