Interpublic's Second-Quarter Profit Falls 18% on Expenses, But Revenue Up

Chairman-CEO Michael Roth Bullish on New Business Pipeline, Improving Creative Output of Agencies

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Interpublic Group of Cos. reported lower second-quarter profit than its peers Omnicom Group and Publicis Groupe, posting on Friday an 18% drop in net income to $80 million.

Interpublic CEO Michael Roth
Interpublic CEO Michael Roth

The drop was attributed to expenses while revenue from recent new business wins were not reflected in the quarter. Interpublic said its expenses included investments in talent (headcount was up 2.7% in the quarter), particularly to ramp up to staff new business wins such as Cadillac, and acquisitions that closed, including three in India.

"We incurred some expense in Q2 ahead of related revenue on some of our recent wins," said Interpublic Chairman-CEO Michael Roth, on a conference call with analysts. "But these are significant new assignments, accretive to our results, and that investment will pay off going forward."

He added: "The other key factor that weighed on profitability in the quarter was the impact of challenging business conditions in Continental Europe. We will be very focused on converting revenue growth to profit at high rates in the second half of 2013, as we have done in recent years. We'll also be vigilant in managing the impact of declining revenue in Europe. These will be the critical factors in delivering on our margin objective for the full year."

Chief Financial Officer Frank Merganthaler on the call noted that the decline in Continental Europe was steeper in the quarter than recent trend, with organic revenue falling 8%. "It's clear that macro conditions continue to weigh on client willingness to invest in the region. Revenue in the month of June was under notably more pressure than we had seen earlier in the quarter. Germany, which is our largest market on the Continent, and which was stable last year, decreased in Q2. France, Italy and Spain were each negative as well. The Continent was 11% of our Q2 revenue."

Second quarter 2013 revenue was up to $1.76 billion, compared to $1.72 billion in the second quarter of 2012. Organic revenue was up 3.3% in the U.S. and 0.8% internationally.

During the conference call, Mr. Roth spoke at length about the company's improved performance in the first half of the year on the new business circuit. He called out wins for Cadillac, Amazon media, and Zurich Financial and noted that the group is succeeding at delivering what he called "open architecture solutions" for clients that pull together a custom team for a client to solve a specific marketing or business problems.

He also highlighted the improved performance of Interpublic agencies at Cannes Lions International Festival of Creativity last month. Mr. Roth claimed that IPG won 30% of the Grand Prix awards -- claiming that was more than any other holding company -- and said McCann's 'Dumb Ways to Die' campaign was the most awarded camapign in the festival's history. The performance of McCann during the ad fest is "evidence that you can be a global network and still succeed on the creative side," Mr. Roth said.

Looking towards the back half of 2013, Interpublic will see how new management atop several of its agencies will play out. Martin Agency has a new CEO in Matt Williams, Hill Holiday has a new CEO in Karen Kaplan, and in the next couple of months, DraftFCB will finally get its new leader when Carter Murray's noncompete agreement with WPP is up and he can join.

"Draftfcb has faced revenue challenges this year due to 2012 client losses, but we believe its holistic and highly accountable marketing approach remains right for today's client needs, the agency has made progress in raising the bar on its creative product and we believe it will attract talent and new business once its new leadership is in place," said Mr. Roth.

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