The Interpublic Group of Companies, Inc. (IPG) Earnings Call Transcript & Summary

Everyone here, and it is my pleasure to welcome to the stage Chief Executive Officer of Interpublic Group, Philippe Krakowsky. I'm Brian Fenske, TMT sector specialist at Bank of America, subbing in for my esteemed colleague, Adrien. So welcome. Thank you for doing this again. We really appreciate it.

So exciting time for your company and for you. So I have some questions here I want run through, but I would love for you to expand a little bit as I'm deeply interested in AI, the intersection of tech and AI and agencies later.

All right. So we've got minute 1 and the word AI has been used.

Yes, I have to get it. But -- so starting from the top, at the first half results, you reiterated your guidance for down 1% to 2% organic sales growth despite being down 3.5% in the first half. So some stakeholders in the ecosystem have talked about reduced client spending in either the auto or CPG categories. Are you observing that? Is that factored into some of your thinking for the second half? Because I guess we got some questions on that first half or second half dynamic.

Sure. That's a lot to unpack. So I guess before I go to a client sector analysis, I'd just unpack and obviously, for folks who have been tuned into our story or who heard what we had to share when we took folks through the first half results, that first half result reflects a number of large client losses that took place last year. And interestingly enough, we think that the big news around us, obviously, which is the acquisition and the combination -- acquisition by a combination into Omnicom is a function of or strategically really kind of addresses a number of those things. So the 3.5% is the weight of those client losses, greater in the first half, still evident in the third quarter and netted out by performance that was ahead of what we would have forecasted, particularly in a couple of areas of the business that are strong for us, which are the media business or the media and data business and then the health care business. Then at a macro level, we're not seeing something that says that kind of clients writ large are not very committed to marketing or not continuing to invest and are not, in essence, performing as we anticipated that they would. And then if I get into the kind of client sector areas. CPG, I think for us, you're going to have some strength based on some wins we had in food and beverage. One not insignificant loss on kind of consumer goods. Automotive, not seeing the concern that you mentioned. And I think from across our competitors, this is pretty consistent. We have one competitor who's probably an outlier, who seems to see more reticence on the part of clients. And then other segments, quite strong. Tech and telco, which a couple of years ago was challenged, really, really bouncing back. And I think a lot of the innovation we're seeing in that space has to go out and be introduced to consumers and financial services, a couple of other segments. So the way that -- from where we sit, the client climate is pretty solid. It's sound.

That's good to hear. And how about health care? It's been a dramatic story in the last 2 years with GLP-1s and Trump administration and RFK, I would just love to hear a little color.

So a big -- one of our strongest capability areas, I guess, I'd call it, so we would say that we feel very good about what we are able to do with clients in that space. We also bring some scale in that space. And again, there -- other than one-offs that are really specific projects tied to very specific policy news, we're -- so scale, global clients in the health and pharmaceutical sector, still quite a bit of activity in terms of new business and very strong performance in our portfolio as we look at '25.

That's great. Good to hear. So getting to this -- the next magical topic of AI. But investors are obviously preoccupied with AI and the potential of how it could shape or impact advertising and marketing industry, creative industries. One of the concerns is that it could deflate the revenue pool, particularly on creative and the creative services that advertising agency have long provided. How far advanced are you in terms of changing either the compensation model away from cost-plus into outcomes output? That's one question. But do you think additional acquisitions might be required to complete the skill set in that area? We've seen AI tuck-in acquisitions in other parts of tech starting to really manifest. And just how are you preventing from the potential that some of your customers just in-source or in-house some of these AI-related creative capabilities and others?

Look, I mean, I don't think that we're immune as an industry, right? Everybody is answering the question around to what extent is this technology something that you're prepared for, something that could potentially be disruptive, something that could potentially be additive or represent opportunity. Like the first place that I would refer to is the parts of the business where we're already 5, 6-plus years in to incorporating AI, data at scale and the ability to use those to drive better decisioning and more accountability, more clarity around the impact of the activity that we engage in with clients. So in the media and the data parts of the business that has been a net positive because it's allowed us to actually move upstream with clients. So to then get to the question that you're asking, I think that it requires that we connect those capability sets into the platform part of the business and into the data stack. And when we do, so when you take more "traditional" capabilities like production or like consumer advertising, and they're part of these integrated end-to-end solutions. I think what we'll see is we'll see a shift in some of our talent will upskill, which is what we've seen, like I said, in some of the more tech-enabled parts of the business. I think that what we'll be able to do is to evolve the compensation models. And I think initially, it will be kind of a hybrid of where we are now in cost-plus with incremental say asset-based compensation, which -- where we are seeing that with a number of our clients in that space. Outcome-based compensation, where we have done that, as I said, in the more precision and data-informed parts of the business. So we're fairly far along in thinking through what the impacts are. We've got a tech platform inside of our business that allows folks in these more "traditional" areas of the business to access data and to use AI, whether it's to drive insights, whether it's to ideate faster, there's a huge need on the part of clients for just the amount of content that's required. The fact that you need to version, the fact that you need to iterate. So there's demand coming at us, which I think we're going to be well positioned to meet. So I think it's awfully early to sort of suggest that it's de facto going to be deflationary to revenue in that part of the business. I think what it will actually likely be is some of that client investment will shift to new, more tech-informed activity. And then there will be the opportunity to work with clients on these new compensation models that align what we need to achieve together and their business results to the services that we provide. But it makes for a better headline to just say the world is -- the sky is falling.

No, I think you bring up a great defense or a point, which is to say that, one, the agencies have been sophisticated and more sophisticated than people appreciate. And two, you're also looking out for the brand and for the client, which, as we know, the world of LLMs can be a bit of the Wild West.

Well, as we have found in, what, the last 1.5 weeks or 2 that there's definitely meaningful social risk inherent in some of what's going on there. And I think having a partner that has expertise in the areas that we do and can help you bring your brand into that world but do so in a way that doesn't necessarily -- that doesn't expose you to some of that risk is important.

Yes, exactly. At [ Cannes ], you showcased the launch of a new Kinesso offering, which blends creative, production and media all in one place for customers. Have you been able to roll it out yet with some core clients? And does that drive a potential revenue uplift or better retention?

Yes, all of the above. So that -- and it's interesting because it then also kind of dovetails with direction of travel for us, again, as part of kind of the new family that we are -- that we'll be joining. But that platform offering, which was originally incubated and built, as I said, in kind of our media and precision business, now has breadth, so that it's got modules that you can implement when you're engaged in any kind of marketing activity. So accessing the data to generate insights. If you're in a creative agency or a public relations agency working on the clients' kind of earned and owned assignments, connecting that through to how we produce the asset, whereas before, it was how we activated the asset in the media ecosystem. So we're using that with a number of our sort of larger clients. We bring it to bear on a pretty consistent basis in any net new business opportunities. And then to your point, it both creates a pathway for these new compensation models, but then also does make us kind of more core or fundamental to the way in which clients go to market. And from a retention -- in some of our businesses, whether it's in media where there's a sizable performance or outcome-based piece to how we are remunerated to data where they're long-term clients -- I mean, long-term contracts, they're multiyear contracts. So I think it that offering, which you referenced, which we showcased then but have been building for a while, does all of the things you're talking about. It opens the door to different kinds of relationships, and it gives us the ability to plug more of what we do into this more attributable model where we can prove the value of what we do.

Excellent. So I think in your roster of clients, you now have some of these AI companies like Perplexity and I believe, Anthropic. Can you see these companies -- obviously, we know their valuations. We know the heat and the sizzle around them. But do you expect them to be significant clients over time, users of marketing and advertising services? Do they behave differently so far than other categories of customers?

Yes. I mean I think we've seen it in past cycles when you saw a lot of innovation happening in the tech space, right? And so I've been doing this for a long time. And so one tended to want a certain kind of client and in the early days of innovation in tech, when that meant Microsoft and Apple, there was a sense of are those clients were going to behave like these other clients, is there a long-term future with those clients. That worked out pretty well. Second wave of that would have been when Google and Meta were becoming meaningful users of the kinds of services that we provide. Similarly, Amazon, important client and a valued client. And then now you have these organizations. And so I think what will happen is that they do need to take their stories out into culture and kind of broad public consciousness. They need to mean something to consumers. I think like with any business where there's a lot of innovation, there'll probably be a bunch that make it and some that don't necessarily come through. But we're not seeing them behave in a way that's -- they're sophisticated about the things you'd expect them to be sophisticated about, which is good from where we sit because they understand tech and they understand data, and they're interested in almost jumping to the newest model of how we engage with clients right out of the gate. But other than that, no, nothing too different.

Great. So last quarter, you had surprised market to the upside on margins. So margins were better, raised the margin target for the year. Now what are the drivers of this margin upside? How are you able to do this? And is any of this pulling forward potential margin upside or synergies that you might have realized post Omnicom merger or totally unrelated, just thinking about that.

No, I think they're unrelated. They're parallel paths, right? And so -- you've heard John and the Omnicom management team speak to what the merger synergies are and what all the buckets that will add up to that number are. And broadly speaking, I think you can characterize those as you take two scaled public entities and you make them into one, you look for a lot of redundancy in what you could refer to as sort of the supporting infrastructure or the back office of this entity is. What accounts for what we called out in the second quarter there and what we've been doing is our transformation program, which we announced as we went into this year, which if you think about us as a stand-alone with the challenges that we were facing on the top line due to these losses last year that had to do with, I think, some structural things in the business because we had come off of a number of years of outgrowing the sector. But what we've done is really think about ways of working, embedding technology, centralizing a lot of functional areas, standardizing a lot of ways of working. And then in some of the delivery areas also thinking about the benefits of kind of a platform approach across the enterprise. So that makes us, I think, a healthier company as we come into the new company. But it's largely whatever the word that we're going to use to say, that what you have are these two parallel activities where the overlap is minimal.

Right. And while we're on the merger, can you provide any update on either the time line or any major hurdles there?

We don't see major hurdles, which then means that we're still on the time line we called out at the very beginning, which is it's a very sizable combination. It's got a lot -- there are two companies that are global in nature. And so we've said all along that we'd have 18 jurisdictions to clear. We're 15 of the 18 in but nothing in the conversations has led us to change the conviction we've got that it's back half of the year closed, and we're now in September. So that would indicate that we're relatively close at this point to success.

Absolutely. So in the midst of this, as we approach the merger, how is IPG preventing staff attrition of some of the most critical talent at the firm?

Well, I mean, it goes back to what I called out earlier, which is, I mean, I think that we're clear that if you've got these two large entities, they're both public, these fairly federated companies, and you're going to find meaningful synergies and some will be the purchasing power that the entity brings into market, some will be how you consolidate some sizable spend areas like real estate, but some will clearly be around the people. And so on corporate functional areas, that's definitely not as straightforward. In terms of the talent question, which has been interesting because you've seen it called out a lot in industry press. You've definitely seen it whispered hopefully, by some of our clients who were like, hey, it's got to be bad for them in some way. But -- because there are a lot of benefits to our coming together. But the people who serve clients and the people who generate revenue see the strategic upside to this, and are excited that they get more to bring to bear to solve client problems. They get more to go to clients with, in the way of solutions or tools. And so like 9-plus months into this thing, all of those headlines around talent flight, talent flight really haven't materialized. And I think it's because there's a lot of enthusiasm for what it's going to mean to be a part of a company that has really strong commerce capabilities, a really remarkable data asset, sort of resources at a global level in terms of where we're complementary to each other in terms of our geographic strength. So that just feels like it was overblown from the beginning. And we spent a lot of time in the field with our clients. We spend time with our people. So it's not that we're not making sure that people are okay and that they're on board. But what we're finding is that they're very leaned in and they're eager for it. So...

Yes, an opportunity for the talent, if you will. So on this topic, a second because there may be some listeners who are not super up-to-date on the ad agencies and your company. But if you rewind the clock 15, 20 years ago, [ they were ] holdcos and that owned a bunch of boutique agencies that were little fiefdoms and little -- had their own CEOs, their own CFOs and probably not as much back-office synergy as they could have had. But then over the years, a lot of that's been changed. Can you sort of like fast forward to how IPG as it stands now is really a more seamless organization and not a bunch of disparate agencies as they once were. Because I feel like that is probably underappreciated by some investors who aren't up to date.

Sure. I mean, to your point, I think that across all of the large holdcos, how they were built and the degree to which they were still somewhat federated is more a thing of the past than not, right? Now that isn't to say that you couldn't do better. I mean, I think we're demonstrating just with the progress that kind of we're making around thinking about like just ways of working. The pace of change is significant. So you're kind of going there's got to be ways in which you can embed tech and you can embed platforms so that you can standardized ways of working, which isn't the silos piece that you were talking about and isn't some of the kind of messy rearview mirror stuff, right? And then the more you connect all the pieces, the better the product is because from a client point of view, they get seamless delivery of set of services, and it's connected to something that gives you accountability and clarity around kind of the value that's being generated or like I said, whether it's outcomes, precision around audience definitions, some of the benefits you get from how you show up in the market when it comes to media owners or other players in a now pretty complex ecosystem because there's martech and ad tech and so on and so forth. So I think that we left that very decentralized cottage industry phase behind a while ago, but there's still a lot of opportunity and need now. And one of the things that you've heard from both John and I, is the investments we make in tech and the word that you mentioned 2 seconds into the conversation, the need to kind of invest in AI and ensure that you've got -- you're provisioning people with the best tools and resources, all of that, we can make now in a much more centralized way at a level of investment that means that we are a really credible player and then everybody gets the benefit of that, right? And so you're right that the perception of the industry and the reality are probably -- there's a little bit of a gap.

I agree with you, the opportunity is immense to not just on the synergy side, but the scale and the efficiency you can provide to clients is just going to be different. Just going to resonate in this market. And one data point was Dentsu was said to be looking at potentially disposing of their international business. Would that change the industry in any way? Or any thoughts?

Not dramatically, no. I mean I think it's a modest-sized asset at this point. And I don't know that it has anything that sits inside of it that is particularly differentiated. So there's obviously some noise around it because they seem to have confirmed that it's a process that's begun on their side. But I'm sure we'll hear any number, we'll hear a lot of speculation about where it might end up. But my sense is that it's not in and of itself something that changes the math a lot.

Right. Okay. Now one topic that's come up lately in the world of marketing, search and AI, is the idea that AI-related searches, whether you do it on ChatGPT or Google are giving you the answer and not giving you 10 blue links and not sending you around the Internet. So it's making customer acquisition potentially harder and making traffic harder to come by. We had few tech companies, maybe it was HubSpot, Monday, brought this up. And we can make too much of it or too little of it. But I would love to just hear your -- if you have observed that, if there's any thoughts on is business discovery changing and traffic direction changing? Is that an opportunity for you?

Well, look, I think consumer behavior changes based on what technology gives you is a way -- in the way of tools to navigate this incredibly overwhelming amount of information that we all deal with on any given day, right? I think consumers are smart though. And so there is a point at which they go, okay, am I outsourcing this? Am I missing something by outsourcing this in a certain way, right? So am I missing choice? Am I missing -- do I try it this way? And do I like the results and the recommendations that come back to me? Is it as interesting? So I think it's sort of TBD, whether or not it will be -- it will de facto become "the new avenue" for discovery. So that's one piece of it. The next piece is that when things change and when things get a bit more complicated and when marketers need somebody to help them figure out how are we going to solve for this, and how are we going to then find ways to intersect with the consumer, identify the audiences that we should be talking to in order to unlock growth, that is an opportunity for us. And then I guess the last piece I'd call out is I'm not sure that there's ever been a medium that hasn't hit a wall and discovered that it likely needs to be ad-supported.

Totally. I was just going to bring that up. Yes.

Right? And so the fact that in...

Uber, DoorDash, you name -- Netflix, Spotify.

Yes, the streamers like -- and so in like top of the first inning, 4 pitches into the first batter, everybody is like assuming they can now tell the rest of like the story of how this game is going to play out. And I'm not sure that I would draw that conclusion as yet.

Right. Yes. My observation would be when you find a big tech growth industry that's deeply subsidizing some user experience.

Eventually.

Like giving away content or like giving away a free ride, advertising usually not far around the corner.

And again, that then becomes an opportunity from where we sit.

Yes, yes. I absolutely agree. So just again, like high level, ad agencies are trading -- ad agency stocks are trading at pretty depressed valuations, not quite financial crisis levels, but pretty cheap, I mean, 8, 9x earnings. What -- you know the business better than any of us. What do you think is most misunderstood about the businesses? I was looking, and I would actually say the earnings revisions have been way more durable than a lot of stocks that have -- that I cover, even though as we've talked about, revenue slowed. But what do you think the market might be misunderstanding about your industry in general?

Well, I mean, I think it's been the case for a couple of years because, look, I mean, that's not a multiple. If you dialed back 36 months, that would have been a meaningfully different multiple, right? And even at that multiple, I think that what was missed is that there's a great deal of tech in the model that whether it's what Omnicom has with Flywheel in the commerce space, what we've got with Acxiom that we have pretty powerful data assets. And so I think both of those are misunderstood and then likely not reflected. And then I think the fact that the AI, sky is falling part of the story seems to have landed in some areas to a greater extent than in others, and that I think we're going to do well, notwithstanding some of those concerns. Those are probably the three thematic elements that if people understood them better -- this idea of it's a tech-enabled service. It has the capacity to build out both outcome-based and SaaS compensation models and it sort of sits on top of a powerful data -- combination of data assets and the capacity to innovate and incorporate these changes in a way that are going to actually not just benefit us "in terms of that we're more efficient," but that it will help us unlock growth. I think those are the ones.

And in this industry, this merger, transformative merger for any of us who followed the industry for a long time. And congratulations on the merger. I think it's very exciting. But is this going to be like a rallying cry for your company, for this merged company to help with recruitment, to help with changing the perception that this is kind of legacy media industry, and that it's not to bring forward some of those elements?

Well, I mean, I think that it's exciting and interesting to our folks who work with clients. And as I said, the people who are delivering value to clients and who are generating revenue. It's been something that we've gotten very, very positive feedback on from clients. So I think marketers see that there's a meaningful benefit to them. So I think in those ways, it will definitely be very, very -- it will be powerful and well received. Whether it's a rallying cry that helps us get people to understand the evolution of the industry, the complexity, and I don't know that in and of itself, it leads to re-rating other than over a period of, say, 24 months. I don't think that -- like I don't think on day 1, it gets us that. But I think it does give us a platform from which we can prove that case.

Yes. No, I think there's a lot to like about it. So we're about out of time.

I appreciate it.

Yes, I wanted to thank you. And again, congratulations on the merger and wish you well, and thanks, everyone.

Thanks all.