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IPG Q3 Hurt by Europe

Analysts show little interest in Publicis-Omnicom merger

Interpublic CEO Michael Roth

Interpublic, in a call to investors today, explained its disappointing third-quarter results by explaining challenges in the troubled Eurozone and significant new-business investments at the company year to date. While analysts focused on those reasons for IPG’s shortfall, they were oddly quiet about the impact of the pending Publicis-Omnicom merger that is about to transform the competitive landscape for players like Interpublic.

It was near the end of the session’s question-and-answer period when it came up: Interpublic CEO Michael Roth was asked whether that transaction is proving to be an opportunity for his company to hire execs from those rivals. Roth said IPG units have already recruited talent, and added: “Whenever you have a transaction like that, there is disruption and uncertainty. People will be looking for new jobs. We have already seen a number of candidates who are looking.”

He specifically mentioned Draftfcb: Carter Murray, the former North American CEO of Young & Rubicam who took over as global CEO in September, immediately hired Nigel Jones, the head of Publicis U.K., to become Draftfcb’s global chief strategy officer. Roth also said Interpublic media companies are hearing from execs at Publicis and Omnicom operations.

The seeming lack of Wall Street interest in the merger had Roth laughing. In his opening remarks, he alluded to it without being specific, saying Interpublic had proven it has the scale to compete in the media world, but he added “bigger doesn’t mean better” when it comes to areas like creativity, consumer insights and client services. Asked later, Roth said he didn’t think there was a “silver bullet” that would catapult Interpublic up the corporate food chain, where a Publicis-Omnicom Group will become the industry’s largest company. “Highly unlikely, but you never know,” he said.

Interpublic has been strengthening its balance sheet: Three years ago the company had $2.3 billion in debt on its books; it now has $1.7 billion. But more realistically, as IPG returns to making acquisitions, it will be looking in areas like digital.

The real concern analysts had were Interpublic’s numbers. The company reported third-quarter revenue of $1.7 billion, an increase of 1.8 percent from the year-earlier period, but net income slid 34 percent to $45.4 million. That's down from $68.7 million in the 2012 period and $208.1 million in 2011.

The third-quarter results include a non-operating, pre-tax charge of $45.2 million, related to the early retirement of the company’s 10 percent senior notes due in 2017 in a move to eliminate expensive debt.

Aside from the deteriorating economies in much of continental Europe and new business expenses, Interpublic, which receives 3 percent of its revenue from government accounts, blamed results on the three-week federal shutdown in Washington. Roth said IPG began to see spending cutbacks going back to the second quarter during the budget sequestration.

Organic revenue during the third quarter rose 2.8 percent, which included an increase of 3.7 percent in the U.S. and 1.6 percent internationally, with tougher 2012 comps to a quarter that included higher project work in the U.K. for the Olympics.

Roth cited strong new business from McCann, Mediabrands, Lowe, Weber Shandwick and Golin Harris, which is boosting revenue growth. He said IPG has yet to see the complete benefits of that additional revenue. “The true impact will be seen in 2014,” he said. Strongest-performing client sectors in the third quarter were auto and transportation, consumer goods and healthcare. The company’s revenue from technology and financial services slightly declined in the third quarter. Retail was more strongly off.

Interpublic derives 10 percent of its revenue from continental Europe, where revenue dropped at a lower-than-expected rate of 5.9 percent in the third quarter. That exposure is smaller than IPG’s competitors and because of that the company feels the impact from even small client cutbacks and fluctuations in spending. Roth made it clear that Interpublic will be looking at year-end staff downsizing as well as adding talent and tactical acquisitions to strengthen offerings.

Interpublic said it is currently on track with its objective of a 2-3 percent full-year revenue increase but cautioned about the continued impact of European results and spending for new business.

Among those on the analysts' call who were dismayed by the results was Deutsche Bank’s Matt Chesler. In a note, he wrote, "IPG misses on the top and bottom line and hedges about full-year margin outlook. The margin target is at risk due to investments related to new clients, and likely severance in Q4 due in Europe. We think the market will tolerate a degree of delayed margin ramp when it is due to strong performance at the agencies that should lead to higher organic growth in coming periods, but overall the topline miss and seeming push-out of near-term margin target is disappointing.”

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