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Digitas Revises Projections Downward

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Digitas, the interactive and direct marketing agency, said on Tuesday that it expects to post second-quarter revenue of $60-63 million, compared with $70 for the same period a year ago.

The Boston-based company had previously forecast Q2 revenue of $70-74 million in 2001.

"We are not happy with this," said Digitas CEO David Kenny during a conference call with analysts. "The current numbers are lower than expected."

Digitas cut its global staff 3% (about 65 people) earlier this year. Cuts are ongoing, with 115-120 positions to be slashed by month's end, according to Digitas spokeswoman Maureen Bailey. All told, once those reductions are completed, Digitas will have cut its global workforce this year by about 10% to roughly 1,700, Bailey said. Kenny did not return calls late Tuesday seeking further comment on the layoffs, though sources said they will be across the board and affect all offices.

Kenny attributed the disappointing performance largely to "substantial and unexpected cuts in marketing budgets" by financial services clients. Kenny said virtually all such clients -- which at Digitas include American Express, FleetBoston and Morgan Stanley -- have made spending adjustments. Sources said Amex -- long one of Digitas' largest accounts -- has made especially deep cuts.

"I am humbled by the fact that people in this [financial] sector pulled back further than I expected," Kenny said.

Digitas also revised its full-year revenue forecast, predicting revenue in the $60-70 million range for both the third and fourth quarter. The agency posted revenue of nearly $155 million for its combined third and fourth quarters in 2000.

Digitas, which recently surfaced as a possible acquisition target of the Interpublic Group of Cos., said it expects a pro-forma cash loss for the second quarter of about 18-20 cents per diluted share compared with 7 cents per share a year ago. The 2001 second-quarter per share loss, however, takes into account a recent restructuring charge. Without that charge, the per share loss would be about the same as a year ago, according to numbers provided by Digitas. The agency expects to take a $13-16 million charge for the quarter and anticipates that the restructuring will produce annual savings in the $25 million range.

The company in Q1 said its 70 top executives would take "temporary" 5% pay cuts. Those pay cuts remain in place, Kenny said.

On the plus side, Kenny said he doesn't expect significant spending cuts by clients in other sectors, such as automotive, retail and packaged goods. Recent new-business wins, such as Barnes & Noble, BestBuy, GM's GMC commercial trucks division, Gillette's OralB, Saab Europe and Williams-Sonoma, are positive signs for the future, he said.

Digitas' shares have consistently traded at $6-7 in recent months on the Nasdaq exchange.

Sources have said Kenny is involved in ongoing talks with executives at New York's IPG in an effort to align the shop with the holding company, likely as a unit of IPG's Cambridge, Mass.-based Allied Communications Group. Kenny has declined to comment on any possible deal, preferring to focus on efforts to grow Digitas organically. IPG may be waiting for Digitas' financials to improve before going ahead with a deal, not wanting to overpay for a company that has yet to show a profit, sources said.

Digitas in 2000 lost $23 million on revenue of $288 million in its first year as a public company and will report earnings and revenue for its second quarter on July 31.