Interpublic Profit Slides in Third Quarter, Revenue Sees Slight Uptick

CEO Michael Roth Highlights Struggles in Continental Europe, Government Shutdown

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Interpublic Group reported net income decreased 34% in the third quarter to $45.4 million, compared to $68.7 million the year before. Deutsche Bank analyst Matt Chesler in a note Friday morning called the results "disappointing."

Revenue saw a slight boost of 1.8% to $1.7 billion, while organic revenue increased 2.8%.

Interpublic Chairman-CEO Michael Roth
Interpublic Chairman-CEO Michael Roth

Michael Roth, IPG's Chairman and CEO, told analysts on a conference call Friday that the results were impacted by macro conditions in Europe "that remained more challenging than had been expected at the outset of this year." He also attributed the dip in profits to investments in new business activity, such as temporary labor that accounted for 3.8% of revenues.

"We remain on track to deliver against our full-year target of 2-3% organic revenue growth," he said. "We will continue to drive to our target of 50 basis points of margin expansion for the year, though delivering such a result will depend on very strong performance in the fourth quarter. We are considering targeted year-end cost actions to appropriately position the company for further operating margin expansion in 2014 and beyond."

Revenue in the U.S. was up 3.8% to $976.6 million due to strong performance by McCann, Mediabrands, PR agencies and digital functions, Mr. Roth said. However, government cutbacks took a toll.

"It bears noting that, given our strong portfolio of domestic public sector clients, U.S. organic growth was adversely affected by 100 basis points in the third quarter as a result of government cutbacks," he said. The cutbacks from by both sequestration and the shutdown "could potentially impact Q4 as well."

On a global basis, government work accounts for about 3% of IPG's business, and in the U.S. it's also 3%, he said. "We started seeing some cutback in the second quarter but in the third quarter we saw that clearly," he said on the call. "Sequestration had a direct impact on that. We are probably a little overweighted on the government side of the business, which is a good thing, but during this period it adversely affected us."

IPG took a one-time, non-operating charge of $45.2 million related to the early retirement of some expensive debt, which dragged down results. Despite the decrease in net income, Mr. Roth emphasized the company's health in terms of debt. "Only a few years ago, our total debt was $2.3 billion; today that's down to $1.7 billion," he said.

International revenue was flat at $724 million. While IPG saw organic growth of 11.3% in AsiaPac and and 8% in LatAm, the UK and Europe were more challenging. Revenue in Continental Europe was down 5.9%, and organic revenue was down 9.3% in the UK. Regarding the decrease in the UK, Mr. Roth noted, "Last year's 25% Olympics-related growth was a particularly steep comparison."

"We'll stay focused on adding to our [digital] capabilities organically, through hiring and training, as well as incubating and growing newer capabilities, such as multi-channel automated media buying," said Mr. Roth on the call.

New business was solid in the quarter, he said. The company won business from Hershey and Nationwide Financial. Lowe London office defended its Morrison's assignment, and DraftFCB retained the Kmart creative work in the US. "Revenue related to our wins is not fully reflected in 2013," he said.

By industry, healthcare increased 15.5%, but the holding company continues to see a drag in retail, said Mr. Roth on the earnings call.

Without directly referencing the pending merger of two of Interpublic's bigger rivals, Publicis-Omnicom, he said: "We've proven that we have sufficient scale and expertise to compete effectively in the media and digital arenas. But bigger doesn't mean better when it comes to creativity, consumer insight, client service, or the integration of marketing disciplines."

Interpublic's total head count at quarter-end was 45,300, which is an increase of 1% from June 30. Mr. Roth noted that the mega merger is an opportunity for Interpublic to snag top talent. "Whenever there's a transaction like that there will be some disruption and uncertainty. We have seen a number of candidates already looking. We view this as an opportunity."

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