IPG Reports 2.7% Q1 2017 Organic Growth

Interpublic Group of Companies (IPG) reports a "solid" first-quarter 2017 revenue of $1.75 billion, up 0.7% from $1.74 billion in the first quarter of 2016. Organic revenue increased 2.7% compared to the prior-year period, driven by an organic increase of 2.9% in the U.S. and 2.2% internationally.

"The first quarter is seasonally small for us, but our first quarter results are consistent with the view we had coming into the year, and the tone of the business remains sound," says Michael I. Roth, chairman and CEO of IPG, during a call with investors. "Outstanding consumer insights, industry-leading creativity, top tier digital capabilities, and the delivery of efficient and precisely targeted communications have all become hallmarks of the agencies in our portfolio. By continuing to deliver integrated 'open architecture' solutions and increasing investment in our holistic data platform, we will ensure that we stay highly relevant in today's complex marketing landscape."

Operating income was up to $29.7 million, compared to $23.0 million in 2016. Staff cost ratio, which is total salaries and related expenses for its 50,200 staffers as a percentage of total revenue, was 72.7%, similar to 72.8% in the same period in 2016.

Net interest expense of $15.7 million decreased by $1.1 million in the first quarter of 2017 compared to the same period in 2016. Net cash used in investing activities was down $33 million, compared to $60 million year-over-year.

During the quarter, the effect of foreign currency translation was -1% and the impact of net divestitures was -1%.

Continental Europe -- which comprises roughly 8% of IPG's revenue -- reported organic revenue up 6.7%. Germany and Italy were solid performers, while France and Spain were flat. Lower spending in China, coupled with IPG "lapping exceptional growth" last year hindered Asia-Pacific's reported organic growth of -2.7%.

Solid performers in Chile and Argentina helped to support Latin America's organic growth of 3.7%, which was offset by disappointment in Brazil.

Other markets reported organic growth of 7.8% thanks to strong performers in Middle East and Canada.

Healthcare -- both worldwide and in the U.S. -- remains one of IPG's strongest industries. Retail is another emerging opportunity, says Roth, noting that these advertisers aren't traditional retail department stores, but rather chains like Aldi, Staples, and Amazon, which IPG categorizes as retail.

Cost pressure remains at consumer packaged goods clients -- however, Roth sees these cutbacks as an opportunity. These multinational clients use hundreds of different agencies and IPG seems to win these consolidated accounts. "Clients always want us to do more with less," says Roth. "It is incumbent on us and the work we do to move the needle." To that end, IPG is investing heavily in analytics and data to demonstrate its value and performance, he says.

The new business pipeline is strong thanks to digital accounts and "quite a lot of activity in media," says Roth. Traditional AOR business remains a challenge.

IPG sees opportunity with the convergence of competition from rivals and similar sources, like consultants and publishers. In fact, IPG is going into the consultancy business itself, says Roth. Ultimately, IPG views these new entrants as possible "partners" rather than competitors. Roth could foresee in five years partnering with them to provide enhanced services to IPG clients.

IPG believes it is "well positioned to achieve our full year targets of organic revenue in the 3% to 4% range, as well as to improve operating margin by an additional 50 basis points relative to 2016 levels," says Roth. "Combined with the strength of our balance sheet and our commitment to capital return, that means there is significant potential at IPG for further value creation and enhanced shareholder value."

While these performance indicators appear to underscore the network's potential for the coming year, Pivotal Research Group's Brian Wieser says IPG's results were "worse-than-expected," believing IPG risks relate to blowback from the transparency issue, squeezing fees from clients, competition from adjacent industries, reduced competition between marketers and demand for advertising services. Wieser continues to rate IPG 'Hold' and maintains its year-long price target at $26.

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