The Interpublic Group of Companies, for years seen as the lame duck of the US public companies in the marketing services sector, is celebrating a much improved financial performance for the final quarter of 2008. Nevertheless chairman and chief executive Michael Roth is cautious about prospects for 2009 as the recession begins to bite.
Although the first signs of the economic slowdown were reflected in lower revenues for the fourth quarter compared with 2007, Interpublic's operating profit margin rocketed to 17.4% in that period and helped push up post-tax profits for the full year to $295 million before preference dividends (2007: $167.6 million).
"While meeting our 2008 financial objectives is gratifying, the latter part of the fourth quarter and the early part of 2009 have begun to show the negative effect that the broader economic situation is having on the marketing services sector", Roth warned.
Interpublic's year-on-year revenue growth rate of 6.2% was the best of the three global groups that have reported so far. However, if currency movements are excluded, Publicis Groupe would have achieved the highest growth rate of 6%.
© Fintellect Ltd
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Sapient Corporation, the US-based digital marketing and technology consultancy, has made a substantial recovery from its depressed performance of 2007 by earning a post-tax profit of $62.5 million in 2008.
Revenues increased by 21.1% and its operating profit margin recovered from a meagre 3.7% in 2007 to 10.2% in 2008, both stated before goodwill amortisation charges.
Anticipating the hardening economic climate, Sapient has cut its workforce by 8% since the year end and will bear a $2.6 million restructuring charge in the first quarter of 2009 as a consequence. The company has a strong balance with which to face the economic downturn. Cash balances at 31 December were $169 million and its current assets exceeded current liabilities by a ratio of 2.5:1.
MDC Partners, the Canada-based marketing group that owns a 94% stake in the US agency Crispin Porter & Bogusky, was saved from reporting a big loss for 2008 by currency gains of US$13 million. The group had reported losses for each of the previous four years.
MDC reported a near break-even result for 2008 with a post-tax profit of $133,000 after suffering a loss of $10 million on "discontinued operations". Without this loss or the currency gain, MDC would still have incurred a loss of about $3 million.
The group's balance sheet remained highly geared at 31 December with net borrowings of about $104 million, convertible loan notes of $37 million and shareholders funds of $127 million. As a result net interest costs amounted to $13.3 million last year.
Despite increasing its revenue by 9.5%, the group's operating profit margin (operating profit before interest and currency gains or losses expressed as a percentage of revenues net of cost of sales) fell to 10.5% from 12.3% in 2007. However, MDC has not disclosed what portion of its cost of sales relates to staff costs rather than bought in costs and consequently the above margins will be substantially overstated by comparison with most competitor companies. For example, if the operating profit for 2008 were to be measured simply as percentage of revenue it would have been only 3.5%.
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Matthew Freud, in whose public relations consultancy Publicis Groupe has a 50.1% controlling stake, has acquired a 3.3% shareholding in M&C Saatchi. As a result he holds more shares than any employee in the group other than its four parent company founders, Lord Saatchi, Jeremy Sinclair, Bill Muirhead and David Kershaw, each of whom has a 6.4% stake (see table).
In 2004 a trust acquired an 8.1% shareholding in The Engine Group on behalf of Freud and two of his associates.
Michael Spencer, owner of an investment company that acquired an 11% stake in The Engine Group in 2007, is to resign as chairman of stockbroker Numis Corporation and his company INCAP Finance BV has sold its stake in that business for over £15 million.
The move follows an announcement last December that Spencer had failed to disclose that shares held by INCAP in Numis and another company had been pledged as security for private loans. See Major Engine investor in disclosure controversy.
Earlier this year Spencer reduced his role as treasurer of the Conservative Party by sharing the post with Stanley Fink.
Staff and freelance costs absorbed 73% of revenues at European digital agency LBi in 2008, resulting in a lowly operating profit margin of 9.5% before goodwill amortisation charges. The margin showed some improvement on 2007 as the group strove to improve the quality of its client base. With low margins and such a high proportion of revenues absorbed by personnel costs, the group will have little room to manoeuvre as the recession bites. A progressive shedding of freelance and some permanent staff seems almost inevitable.
Net borrowings grew to €20.3 million at 31 December. This debt will be compounded by a further €12.2 million of earnout obligations that are expected to be payable in the current year. Hopefully these obligations will be offset by the group's normal operating cash flow, but this will be depend in part on the impact of the economic downturn on trading.
Omnicom's revenues failed to register the normal upward surge in the final quarter of 2008, resulting in a near 14% decline in post-tax profits when compared with the same quarter of 2007.
Post-tax profits for the quarter were $271 million, down from the $313.9 million reported in 2007. The decline in profits ran counter to the recent trend when the final quarter could be relied upon to produce the best profit of the year (see chart). The profit decline was also exacerbated by a near doubling of finance costs and the $211 million impact on revenues of adverse exchange movements.
The slowdown in revenues was not matched by cost savings and so Omnicom's operating profit margin for the final quarter dropped to 13.3% from the 14.7% reported in the final quarter of 2007.
Post-tax profits for the full year were $1,000 million, just 2.5% ahead of 2007. Overseas revenues fell faster than US domestic revenues.
Japan's largest listed marketing group Dentsu has slashed its forecast profit after tax by 56% for the year to 31 March 2009 - down from ¥25,200 million ($282 million) to ¥11,000 million ($123 million) after allowing for a decline in client marketing spend as well as write-downs in the value of its acquired businesses. Some of those write-downs had already been anticipated (see Dentsu writes £64m off value of its investments).
The latest forecast represents a fall of 69.7% from the result achieved in the previous year.
However, no provision has been made for any drop in the value of its 15% stake in the French-based Publicis Groupe as Publicis does not forecast its financial results in advance. Instead Dentsu has assumed Publicis will perform no less well than in the corresponding period last year.
The latest forecast reflects a fall in operating profit of 21% from its previous expectation, and a fall of 36% from last year's reported operating profit.
© Fintellect Ltd.
In a move presented as a strategic expansion into the digital marketing sector, the Japanese marketing group Dentsu has paid an astonishingly high price to buy the 53% of Cyber Communications that it does not already own. The deal, announced at the end of January, involved Dentsu paying $134 million (¥11,988 million) to other Cyber shareholders under a tender offer.
Cyber is a Japanese listed advertising agency that buys and sells advertising space on the internet. In January it extended its penetration of the internet search market by merging its search marketing business with WPP Group's subsidiary KK 24/7 Search. Cyber retained a majority stake in the merged business in which Dentsu was already a partner.
The latest deal with Dentsu placed a value on Cyber as a whole of $250 million despite the fact that it expects to report a post-tax loss of about $14 million for the year to 31 March 2009 and to make a post-tax profit of little more than $2 million in the following year. Before charging finance costs, tax and exceptional items, Cyber is expected to make a profit (EBIT) of only $2.2 million per annum in each of the two years ended 31 March 2010. Thus the purchase price represents a very generous multiple of 112 times projected EBIT.
Past performance has been better than what is projected for the future. In the year to 31 March 2008, Cyber reported an EBIT of almost $11 million. The current deal price would equate to a multiple of 23 times that historic profit.
Dentsu justified the offer price - which is 2.23 times the average market price of Cyber shares in January - on the grounds that the internet sector is now "one of the core businesses that will be the basis of the future growth of the group". However, the signs are that Dentsu also wanted to get more involved in the business after Cyber announced that it was writing off over $22 million from the book value of its investments - primarily in subsidiaries Criteria Communications and 3P.
BOB WILLOTT
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