Interpublic Reports $102 Million Net Loss

Organic Revenue Down 3% for Third Quarter

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NEW YORK ( -- Its major accounting woes may be behind it, but Interpublic Group of Cos. now has to turn its attention to an equally vexing problem: a group of poorly performing ad agencies.

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The third-largest holding company today reported narrower net losses for the third-quarter and year-to-date compared to 2004. But it also said that major client defections and the costs of the accounting investigation that resulted in its recent financial restatement are causing a drag on performance that could last into the first half of next year.

$102 million loss
Interpublic reported a net loss of $102 million for the third quarter, down from $502 million a year ago. Organic revenue, an important industry benchmark, was flat for the first nine months of the year and down 3% for the third quarter.

"We anticipate that the full-year organic 2005 revenue will be down modestly," said Chairman-CEO Michael Roth. "We can and must do better than this."

The problems facing its agencies were evident in the performance of its group of ad agencies, what Interpublic calls its IAN or Integrated Agency Networks segment. Revenue in that group, which includes networks like McCann Erickson and Foote Cone & Belding as well as stand-alone agencies like Deutsch, was down 3.3% for the third quarter.

McCann and Deutsch shortfalls
Chief Financial Officer Frank Mergenthaler said this was "primarily driven by short falls at McCann and Deutsch." He added that McCann's decrease in organic revenue was also due to new revenue-recognition policy governing contracts. McCann recently lost home-improvement retailer Lowe's creative and media business, while Deutsch has endured a tough stretch with the loss of several clients including Mitsubishi, Revlon, and Lenscrafters. (Both have also won new clients recently. Deutsch has picked up General Motors Corp. work and a mobile-phone startup called Helio, while McCann won a large piece of Credit Suisse First Boston's business.)

"All our units are basically flat to slightly down," Mr. Roth said. "Some are a little bit up. Obviously [direct marketing agency] Draft had a good year and we're excited about that. But we're still in turnaround phase."

Its other segment, Constituency Management Group, or CMG, which includes public relations and other agencies, was basically flat, with revenue up 0.1%.

Stock hit
Interpublic's stock slid to $9.77 early this morning, the lowest point since April 2003. It recovered in heavy trading to $10.12 at mid-morning, still down 35 cents on the day.

Merrill Lynch maintained its sell rating, with analyst Lauren Rich Fine writing in a research report: "Until IPG has demonstrated a sustained ability to win large, new accounts, there will be financial instability in our view. ... IPG shares still strike us at too rich at the current valuation."

While Interpublic has yet to explain fully how the restatement and client losses will affect the timeline for its turnaround plans, Mr. Roth hinted that some structural changes may be in the offing. "I think it's clear that there are opportunities for us out there to be more efficient in how we compete on a global basis and that's where we're spending a lot of our time."

He said the company would talk about realignment issues at its analyst and investor conference set for early next year.

There is already a great degree of debate around the future of its Lowe Worldwide unit, which has been ravaged in recent years by fleeing clients and management turmoil. While new leadership has been in place for about a year, its failure to gain any new-business traction has led some insiders to speculate that it will be folded into Draft or that some of its offices will be shuttered as part of a plan to makeover the network as a boutique.

Lowe 'alive and well'
In today's call, Mr. Roth did not indulge any of that speculation when prodded by an analyst, saying that Lowe is "alive and well" and a "work in progress." He added that "they've taken some actions to reduce headcount."

Interpublic said in its third-quarter 10-Q filed today that the Securities and Exchange Commission this year expanded an ongoing investigation "to encompass the restatement we made in September 2005." The filing reiterated that Interpublic is "cooperating fully with the investigation."

Mr. Roth, in his conference call this morning with analysts, said: "There was no change in the SEC investigation. ... We continue to have dialogue with the SEC and obviously as a result of the [September] restatement we wanted to bring the SEC up to speed in terms of what occurred as far as the restatement goes."

The SEC in January 2003 began a formal investigation into restatements Interpublic made in 2002 dating back to 1997. Last April, the SEC subpoenaed Interpublic to produce additional documents relating to Interpublic's March announcement of a potential restatement.

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Bradley Johnson contributed to this report.

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