Interpublic Group of Companies Inc (IPG) 2023 Q2 法說會逐字稿

Good morning, and welcome to the Interpublic Group Second Quarter 2023 Conference Call. (Operator Instructions) This conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning. Thank you for joining us. This morning, we are joined by our CEO, Philippe Krakowsky and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We will begin our call with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern.

During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that is included in our earnings release and the slide presentation. These are further detailed in our 10-Q and other filings with the SEC. We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance.

At this point, it is my pleasure to turn things over to Philippe Krakowsky.

Thank you, Jerry. Good morning. As usual, I'll begin our call with a high-level view of the quarter. Ellen will then provide additional details, and I'll conclude with updates on our agencies to be followed by Q&A.

Starting at the top with revenue. The organic change of our revenue before billable expenses was a decrease of 1.7% against last year's second quarter organic growth of 7.9%. For the first 6 months of the year, our organic decrease was 90 basis points.

During the second quarter, we saw the same puts and takes on revenue that we've identified and discussed with you since the beginning of the year. Those factors continue to weigh significantly on our performance in the second quarter. And currently, we continue to grow in areas of the business that have been key drivers of success for us over a number of years namely our media offerings and the healthcare sector. We saw solid growth as well in disciplines such as public relations and our experiential offerings.

Consistent with the items we've called out previously, during the quarter, we continued to see reduced spend from clients in the tech and telecom sector as it moves through a challenging period that has included significant cost cutting. Those reductions significantly impacted on our ability to grow in the second quarter and for the first half.

Our digital specialist agencies also continued to underperform in the quarter. As we've discussed previously, the transformation of those offerings continues to move forward, and we've seen some good wins there recently. Restoring those brands to consistent growth is proving slower than anticipated. However, due largely to continued challenges in the tech sector as well as modestly heightened macro uncertainty. Taken together, the second quarter impact on our growth due to the tech and telecom sector and our digital specialists, was approximately 3.5%.

Along with the strength of our media offerings and the healthcare sector, it's worth highlighting that 6 of our 8 client sectors grew during the quarter and in the 6 months year-to-date. We also continue to win some of the largest new account opportunities in market so far this year. Our very strong new business momentum encompasses a diverse set of client industries, including pharma, financial services, autos and food and beverage.

These wins span the full range of marketing disciplines, especially in media as well as global integrated solutions that bringing together creative public relations, experiential and data. As such, they underscore the role that we play as a critical partner to the world's most sophisticated and demanding marketers. To cite an important example, we're proud to have recently significantly expanded our relationship with Pfizer, having been named their lead global creative public relations and medical affairs partner.

Most of the new revenue from our wins is yet to ramp, given that the transition periods between announcement and onboarding are the norm in our industry. As these wins come on stream in greater magnitude, during the second half of the year, we expect their impact to be evident in our results.

Looking at client sectors in the second quarter, we were led by strong growth in automotive and financial services. Followed by growth in food and beverage, healthcare, consumer goods and our other sector of diversified industrials and public sector clients.

Our retail sector decreased modestly against very strong multiyear comparable performance. And as discussed, tech and telecom was a significant outlier. Regionally, the U.S. decreased 2.5% organically in the quarter. Predominantly due to the sector and agency-specific challenges that we've called out. Our international markets decreased slightly by 10 basis points organically with mixed performance by region.

In terms of our segments, our Media Data & Engagement Solutions segment decreased 1.5% organically in the quarter, where we saw good growth at the media offerings offset by challenged performance in the digital agencies.

Our segment of Integrated Advertising & Creativity Led Solutions decreased 3.8% organically. This is a place where tech and telecom and a somewhat more cautious spending climate is weighing on several of our more traditional consumer advertising agencies, and that's impacting segment performance.

Within the Specialized Communications & Experiential Solutions segment, we grew 3.7% organically on top of 11.1% growth a year ago. The quarter was highlighted by increases at both our public relations and experiential disciplines.

Turning to expenses and margin in the quarter. Our operating discipline continues to be a strength as our management teams demonstrate that we have the talent and tools as well as the flexible business model to deliverable favorable margin results.

Second quarter adjusted EBITDA margin was 14.2%, which is ahead of our pre-pandemic second quarter 2019 margin. As expected, our Q2 margin was lower than a year ago, when additions to headcount had lagged a robust pace of multiyear growth. We are effectively managing our flexible operating model, which is clear in our expense for temporary labor, performance-based incentive compensation and SG&A. Each was notably lower than a year ago.

Total headcount decreased by 1.2% over the course of the first half of the year. Expense for severance was elevated in the quarter as we continue to both address areas of the business where performance is lagging as well as further accelerate business transformation and integrate delivery of services and our very strong media offering. We'll see the benefit to margin of those actions going forward.

Occupancy expense decreased from a year ago as we continue to benefit from actions taken on our real estate portfolio. Diluted earnings per share in the quarter was $0.68 as reported and $0.74 as adjusted for intangible amortization and other items. We want to make sure to call out that our EPS, both as reported and adjusted, includes the benefits of $0.17 per share related to the resolution of routine federal income tax audits previous years.

During the quarter, we repurchased 1.3 million shares, returning $50 million to shareholders. That activity brings our repurchases for the 6 months to 3.5 million shares using $128 million.

Turning to our outlook for the full year and having just completed our usual midyear update with our operators, we're positioned to resume solid organic revenue growth in the range of 3.5% to 4% over the course of the year's second half. As we move ahead, we expect that the benefit of net new business will be increasingly meaningful and the underlying growth from several of our larger businesses will also strengthen.

Nonetheless, given our first 6 months, which in Q2 reflect what we believe is modestly heightened macro uncertainty, we are revisiting our full year organic growth expectations to 1% to 2%. At the same time, with strong operating discipline, we remain committed to our margin target for the year of 16.7%, which represents an increase relative to our 2022 full year margin.

The strategic relevance of our offerings is evident in new business performance year-to-date, which, as I've mentioned, has been exceptional. And while we're disappointed in Q2 organic revenue performance, we'll continue addressing certain areas of the business with urgency during the back half of the year. We'll also continue to invest in the multiple growth drivers in the portfolio.

Now I'm going to hand things over to Ellen for a more detailed review of results.

Thank you, Philippe. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on Slide 2 of the presentation, our second quarter revenue before billable expenses or net revenue decreased 2% from a year ago, with an organic decrease of 1.7%. Our organic net revenue decreased was 2.5% in the U.S. and was 10 basis points in our international markets. Over the first 6 months of the year, our organic revenue decrease was 90 basis points.

Second quarter adjusted EBITDA before a small restructuring adjustment was $330.2 million and margin was 14.2%. Our diluted earnings per share was $0.68 as reported and $0.74 as adjusted. The adjustments exclude the after-tax impact of the amortization of acquired intangibles, the small adjustment to our previous restructuring actions and nonoperating losses on the sales of certain small nonstrategic businesses.

It's important to note that our EPS includes the benefit of $0.17 per share related to the settlement of normal course that our income tax audits. We repurchased 1.3 million shares during the quarter and 3.5 million shares in the first half of the year.

Turning to Slide 3. You'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Here, I would just point out that our interest expense and interest income were both elevated compared to a year ago due to higher prevailing market interest rates and the prefunding of our upcoming April 2024 maturity with the issue in June of our $300 million 10-year note.

Turning to the second quarter revenue in more detail on Slide 4. Our net revenue in the quarter was $2.33 billion. Compared to Q2 '22, the impact of the change in exchange rates was negative 1%, with the dollar stronger against currency in nearly all international markets with a notable exception being the era. Net acquisitions added 70 basis points. Our organic decrease of revenue before billable expenses was 1.7%. For the 6 months our organic decrease was 90 basis points. The bottom of this slide is a look at our segments.

Our Media Data & Engagement Solutions segment decreased 1.5% organically. Good growth at our media businesses was more than offset by the performance of our digital specialist agencies as Philippe has noted.

Our Integrated Advertising & Creative Led Solutions segment decreased organically by 3.8%, lower revenue from clients and the tech and telecom sector and a somewhat slower macroeconomic environment will go broadly across the more traditional agencies. IPG Health was relatively flat in the quarter due to the timing of various campaigns ahead of what we believe will be a strong second half. At our Specialized Communications & Experiential Solutions segment, organic growth was 3.7%, with growth across our public relations and experiential disciplines.

Moving on to Slide 5, an organic net revenue growth by region. In the U.S., which was 66% of our net revenue before billable expenses in the quarter, our organic decrease was 2.5% against 8.3% growth a year ago. Decreases in tech and telecom and at our digital specialists, outlaid growth at our media, public relations and experiential offerings. International markets were 34% of net revenue in the quarter and decreased by 10 basis points organically against 7.1% growth last year. The U.K. grew 1.7% organically on top of 4.4% growth a year ago. We were led by broad-based growth across our media, public relations, creative and experiential offerings.

Continental Europe decreased 4.3% organically in the quarter compared with an 8.3% increase a year ago. Lower revenue was mainly a result of decreases in Germany due to lower client spend and a client loss in the market. In Asia Pac, we decreased 2.2% organically compared with growth of 4.8% a year ago. Increases in India and China were more than offset by decreases in Japan and other national markets.

Our organic growth in LatAm was 6.3% on top of 8.8% in Q2 '22, with increases across nearly all our national markets. In our other markets group, which is Canada, the Middle East and Africa, we grew 1.6% on top of 11% a year ago with notably strong growth continuing in the Middle East.

Moving on to Slide 6 and operating expenses in the quarter. Our net operating expenses, which exclude billable expenses, the amortization of acquired intangibles and the restructuring adjustment decreased 30 basis points from a year ago compared with reported net revenue decrease of 2%. The result was our adjusted EBITDA margin of 14.2%. As expected, our margin decreased from a year ago when our organic growth was very strong at 7.9% and hiring lagged and severance was lower as well. It is worth noting, however, that at 14.2%, our second quarter margin is well above the comparable pre-pandemic quarter of 2019.

As you can see on this slide, our ratio of total salaries and related expense as a percentage of net revenue was 68.7% compared with 66.9% a year ago. Underneath that result, we delevered on our expense for base payroll, benefits and tax, which was 59.4% of net revenue compared to 56.5% a year ago. Our performance-based incentive compensation decreased as a percent of net revenue from 4.5% to 3.4% consistent with our revised outlook for the year.

Severance expense was 1.7% of net revenue, which is somewhat elevated from typical levels and compares with only 50 basis points a year ago. Our actions in the second quarter reflect steps to recalibrate the more traditional areas of the business where performance is lagging as well as to accelerate business transformation in our high-performing media vertical. We expect that we will increasingly see the benefits to margin of these severance actions as we look forward through the year.

Temporary labor expense was 3.2% of net revenue. compared with 4.4% in Q2 '22, which is consistent with its role as a variable and flexible expense when revenue growth slows. Each of these ratios is in the appendix on Slide 31. Also on the slide, our office and other direct expense was 14.6% of net revenue compared with 14.7% in Q2 '22. Underneath that improvement, we continue to deleverage our expense for occupancy, which was 4.6% of net revenue compared with 4.8% a year ago. All other office and other direct expense was 10% of net revenue compared with 9.9% in Q2 '22, which primarily reflects higher new business expense. Our SG&A expense was 60 basis points of net revenue.

On Slide 7, we present the detail on adjustments to our reported second quarter results in order to provide better transparency and a picture of comparable performance. This begins on the left-hand side with our reported results and from left to right, steps through the adjusted EBITDA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $21.2 million. The restructuring adjustment was a credit of $1.7 million. Below operating expenses, as shown in column 4, we had a loss of $4.1 million in other expenses due to the disposition of a few small nonstrategic businesses.

At the foot of this slide, you can see the after-tax impact for diluted share of each adjustment, which bridges our diluted EPS as reported at $0.68, to adjusted earnings of $0.74 per diluted share. It is important to note that our tax provision in the quarter includes a benefit of $64.2 million related to the settlement of the U.S. federal income tax audits for the years 2017 through 2018, which is primarily noncash that is $0.17 per share. We are tactically not permitted to adjust for it, but is a large discrete item that impacts comparability, which is why we wanted to make sure we called it out for you.

Slide 8 depicts similar adjustments for the 6 months. Adjusted diluted earnings per share was $1.11 for the period. This also includes the same $0.17 per share benefit in our tax provision.

On Slide 9, we turn to cash flow in the quarter. Cash used in operations was $35.2 million, which was due to working capital use of $281.2 million. Operating cash flow before working capital was $246 million. As a reminder, our operating cash flow is highly seasonal and can be volatile by quarter due to changes in the working capital component. The magnitude of our receivables and payables means that the timing of collections and payments within any single quarter can significantly affect the working capital results.

In our investing activities, we used our $121 million. We invested a portion of the proceeds of our note issuance and short-term treasury securities maturing before year-end. CapEx in quarter was $46.4 million. Our financing activities reflect debt issuance proceeds of $296.3 million. We paid $119.4 million in dividends and returned $50.2 million in share repurchases. Net cash from financing was $109.8 million. Our net decrease in cash for the quarter was $50.4 million.

Slide 10 is the current portion of our balance sheet. We ended the quarter with $1.63 billion of cash and equivalents, we added $103 million in short-term marketable series to be held to maturity, which as I mentioned is before year-end.

Slide 11 depicts the maturities of our outstanding debt. As you can see on the schedule total debt at quarter end was $3.2 billion, that includes the new $300 million 10-year note, which prefunds our $250 million maturity in April 2024. Thereafter, our next maturity is not until 2028.

In summary, on Slide 12, our strong financial discipline continues and the strength of our balance sheet and liquidity mean that we remain well positioned, both financially as well as commercially. I would like to express my gratitude for the efforts of our people and with that, I'll turn it back to Philippe.

Thanks, Ellen. Clearly, organic revenue performance to date this year is not consistent with our expectations for our long-term track record. That said, we continue to successfully be in market with relevant and compelling offerings that help marketers enhance their brands, grow share and deliver business outcomes. Since the start of the year, IPG has consistently led the way in new business, and this positive momentum should provide strong tailwinds as we move into the back half of this year and even more so in 2024.

As mentioned earlier, Pfizer awarded global creative and marketing communications responsibilities to an integrated IPG team, marking the conclusion of the largest and one of the most competitive reviews of the year. Also during the quarter, initiative was named U.S. media AOR for Constellation Brands. UM was appointed global media AOR for Upfield, the global leader in plant-based foods and Mediabrands was awarded the U.S. media account for Bristol Myers Squibb.

This followed the Q1 headline win of GEICO, which also awarded sports marketing work to Octagon. Along with the first quarter's Skoda win in June, Intuit QuickBooks selected FCB as its creative AOR. And McCann Worldgroup won the highly competitive Air India review. During the quarter, IPG also received numerous accolades, including being named Most Effective Holding Company at the U.S. Effie Awards. At the Cannes Lions Festival, our agencies have remarkable success. During many of the festival's top honors, including 1 of only 4 Titanium Lions and 5 category Grand Prix. McCann Worldgroup had a particularly strong showing as I work for a longtime client, Mastercard won 9 Lions including the festival's top honor, the Titanium or its Where to Settle campaign, a digital tool that aggregates employment and real estate data as well as spending insights to help Ukrainian refugees make new lives in Poland.

For Microsoft, McCann created the ADLaM project and digitized a popular West African language spoken by over 60 million people which previously had no written alphabet. That work won 7 Lions, including 2 Grand Prix. Other significant honors include IPG Health's performance as Healthcare Network of the Year and Area 23 earning the prestigious title of Cannes Healthcare Agency of the Year, both of which reflect our continued excellence in the healthcare space. The festival also named FCB its North American Network of the Year for the fifth consecutive year, which demonstrates the consistent outstanding work done by that agency for leading brands in this important region.

Looking ahead, clear that artificial intelligence, which already plays a role in our data-informed media performance businesses will begin to have an impact on our industry as a catalyst for creativity. Technology provides new canvases for brands to work with, and we're seeing the advent of AI tools that strategists and creative people can use to quickly generate and scale ideas.

Given that every competitor will have access to these same kinds of tools stands to reason that great creative ideas will remain essential for brands to stand out and win in the marketplace.

During the quarter, we announced a partnership with a leading quantum computing developer to build new software tools that solve complex data-intensive problems. The partnership combines quantum cloud services with proprietary data drawn from IPG agencies, clients and media partners. Together, we're helping clients identify high-value audiences and deliver more tailored messages at the right time in the right setting. This is one of many such partnerships as we engage with leading AI innovators, including Amazon, Microsoft, Google, Salesforce, Adobe and NVIDIA to establish the Matrix deployment strategy that benefits all of our clients.

On the important subject of retail, during the quarter, we continued to strengthen IPG's Commerce offering with the launch of our Creative Commerce Labs, which are finding new revenue streams for marketers through cross-channel collaboration and partnering with key commerce providers. You will have also seen earlier this week that we launched a unified retail media solution within Mediabrands. This is a dedicated business unit that helps brands manage and optimize performance across retail media networks which, as we know, is one of the fastest-growing advertising channels. This platform identifies which retail networks are performing best for our clients and can allocate spend to maximize sales and profitability.

Brands can augment existing audience data via proprietary Acxiom data sets, and our solution automatically aggregates this cross-network data using AI, power planning and activation. This offering will allow our clients to solve an important pain point in the growing retail media space, which is the lack of standard measurement such to make informed investment decisions.

Turning to segment performance. We saw strong growth in our media offerings within the MD&A Group. As I mentioned earlier, those assets continue to win major client assignments, initiative was just ranked #1 by RECMA for new business over the past 3-year period, and UM was named Campaigns Media Agency Global Network of the Year.

Moving to our digital specialists. At R/GA, we saw progress in new business, including a significant AOR win with Intuit TurboTax in the U.S. announced just last week. R/GA was also selected the Mexico's largest sporting goods retailer, Innovasport for its digital commerce work. Huge, launched and deployed a proprietary AI-powered engine to inform creative platforms on live and drive business growth. And during the quarter, Huge's new productized and consulting offering helped to secure business transformation assignments from driven brands which is the largest automotive services company in North America.

During the quarter, Acxiom announced its win of one of the largest auto groups in the U.S. to implement a customer data platform across their networks and dealerships. The company also continued to renew with many of their premier clients in the financial services, insurance and telecom sectors. These renewals and new wins highlight the value of Acxiom's customer-intelligence cloud offerings, which include the management of brand's first-party data to improve customer acquisition, retention and growth.

At our Integrated Advertising & Creative Led Solutions segment, FCB was named the #1 global network and FCB, the #1 agency in the world by the One Club. FCB New York also won a Sports Emmy for outstanding digital innovation for the AI-driven creative work, McEnroe vs McEnroe for Michelob ULTRA. Campaign named McCann Worldgroup, the Best Network in Europe for the fourth time, and MRM was named Large Agency of the Year at the ANA 2023 B2B Awards. The Global 2022 FD Effectiveness Index, Frank McCann is the most effective agency network in Europe and the #2 most effective network globally. MullenLowe was named U.S. Agency of the Year at The One Show.

Turning to the Specialized Communications & Experiential Solutions group. We saw a strong balanced growth in the segment with Golin performing particularly well. Weber Shandwick showed continued solid growth in Q2, driven by the healthcare sector and was the most awarded PR agency network in Cannes. Our experiential assets also posted solid performance. Highlights at Octagon included the agencies work with Cisco to negotiate the company's sponsorship for the 2023 FIFA Women's World Cup as well as activation of global sponsorships for Budweiser and Unilever in New Zealand at the World Cup.

Strong growth and momentum was driven by clients in the retail, finance and food and beverage sectors as well as the continued integration of technology into live activations. Looking ahead, as mentioned earlier, we are revising our full year organic growth expectation to 1% to 2%, while remaining committed to our margin target for the year of 16.7%, which is ahead of last year's results.

We view our very strong new business tailwinds and coupled with growth in our existing client base, notably in Media and Healthcare as key drivers of our outlook for the balance of the year will also us benefit in 2024. Another factor will be our long-standing open architecture model based on collaboration by design and a foundational data and technology infrastructure through which we integrate our services from agencies across segments in the solutions we deliver for clients. This approach continues to be core to our offerings.

Another ongoing commitment that's been a hallmark of our culture is our work in ESG and DE&I to remain vital in a talent business. Our flexible cost model is an important lever, not only for improving margins in times of growth, but also to consolidate those gains as we've demonstrated this quarter. An additional areas for value creation, as Ellen called out, include our strong balance sheet and liquidity. IPG's ongoing commitment to capital returns has been underscored by consistent dividend growth, and the execution on our share repurchase program.

As always, we thank our partners and our people as well as those of you on this call for your support. And with that, let's open the floor to questions.

(Operator Instructions) Our first question is from Ben Swinburne with Morgan Stanley.

Philippe could you talk a little bit more about the tech sector softness that's impacting IPG's organic growth. We obviously heard for a while from you about some of the specialty agencies at IPG, but it feels like it's broader than that. And so I'm just curious if you could maybe talk a little bit about where that pullback is occurring?

Is it in media project work? I know it's all kind of client specific, but would just help us try to think about how much of this is sort of idiosyncratic to certain clients or part of a broader theme because it would certainly seem logical that technology companies are going to be growing their investment over time but it would be helpful to try to think through how much of this is sort of idio-versus structural.

And then I was just curious what are your focus areas with AI at IPG. In a year or two, what would you like to see the company doing or not doing, what are clients asking you about as you think about this technology opportunity and obviously, the risk around it as well.

Sure. On the first question, Ben, I mean, I can speak to it without obviously going to the level of a specific client, given how we want to be thoughtful. But what we have seen is that the sector is under a lot of stress. If you think about it, it was probably 15% of net revenue for us a year ago in this quarter, it's down to about 12%, right? And I don't think that we're going to be able to call the turn. Although in the long run, I think it is still an industry that's going to return to being a strong growth driver for us.

What we've seen is that given the stress that, that sector is feeling and obviously see it, we're talking about a relatively small group of large companies, right? We're not talking about a long tail or VC-backed or smaller companies. We're talking about a relatively small group of large companies. And as the decisions that they're having to make around cutting costs and obviously resizing their employee base, et cetera, we have definitely seen it in cuts. I would say in project-based businesses definitely and our 2 digital agencies that, as we've pointed out, are in turnaround mode. Over-indexed to those are important clients for them.

And then I think we've seen the kind of curtailing activities in some of the more traditional areas of the business so you would sort of think maybe the consumer ad agencies for us, which I think also does dovetail with a broader trend that we've seen, which is that whether it's the turnaround there or the slightly more uncertain macro is something that we are feeling more in certain areas of the business and others. So the really strong performers and the engines of our growth are not being impacted and yet other parts of the portfolio are. So hopefully, that helps on the tech part of the question.

In terms of AI, it's a very, very broad question, right? And so we're operationalizing AI across the group in a number of ways and actually have been for some time, right? So predictive AI in precision and data-heavy parts of the business. So whether that's Mediabrands, performance media, Acxiom. That's something that's been part of the model for some time. I think that in commerce, we're starting to use it. So you're seeing personalization at scale of content informed by it. You're seeing user support and product recommendations, so chatbots and creating instances in which you're using reviews and a lot of the information that a client has that is their own information as the training set with which to inform an AI, which can then be put to use with a production platform or that can feed into some creative campaign.

It's funny. We won a Lion at Cannes for a really interesting piece of work that we did with a very large baked goods company in Latin America to actually generate a lot of branding work for a very long tail of vendors that are important to them. I think what you're going to see with us is we're definitely leaning now into what are the applications and how we're going to be addressing this on the content creation side of things and in the strategic side of when and how we do content creation.

And what you'll see is the kinds of programs that I'm talking about that we've been working on for some time and now partnerships with some scale experts in the AI space. I think I noted a number of them, where we're thinking about how do we incorporate that into -- everything about kind of how we are going to market with clients. So in essence, our production capabilities, so the infrastructure piece of what we do, what we do that's more advanced, which again, I also spoke to in the prepared remarks, when it comes to the work that's predictive and machine learning informed around data, media, performance media. So I think we're going to be incorporating it in sort of baking it into more and more of the tool sets that our folks have.

And I think the last thing I would point out to you is that I mentioned earlier that if everybody has the same tools, then the Human plus AI combination and the creativity you can unlock there will still be important to our clients. But the other place that I think we are focused is that it will -- if you have a very strong data asset as we do, I think that working with clients and their first-party data our Acxiom data to create unique and proprietary training sets so that they can have AIs that are proprietary to them and solve specific models around marketing and business problems and growth. That's another area that we see as quite promising.

Our next question is from David Karnovsky with JPMorgan.

Philippe, I just wanted to follow up on your prior response. I think you noted macro uncertainty, more broadly, the impact to your traditional agencies. Can you walk through a bit what you're hearing from clients? What's maybe changed exactly? I think prior it seemed like marketers were stressing flexibility, but we're staying invested. So just wondering, has there been some mentality shift here.

I mean if I kind of try to strip it down for you and kind of literally almost go from the top, I'd say -- as we said, the puts and takes have not changed from what we've shared with you since the beginning of the year. So in that sense, I don't think there is new news. The differences are clearly pressure on tech and telco is not abating.

And as we said, you've got this modestly more uncertain macro. So that is leading to delays in client spend. And that's, as I said, impacting some of our businesses more than others. I think that the other thing about the uncertainty around the macro is in our long tail of smaller clients, we're seeing some small cost cuts. So there's a degree of which that's adding up to something that again, is having an impact. And so those are really the factors that led us to looking at where we are at this point in the year and revising the revenue guidance.

But I think I'd point out that our outlook for the year at this point is not contingent on a recovery in the rate of revenue change on those 2 factors. So we're not saying it's delayed some things which, for us, were important. And as we pointed out, cumulatively cost us by 3.5 percentage points of organic growth. Going the other way, you're seeing the client losses that we called out. So we came into the year with a net negative new business position. So that was a headwind, and that has actually shown up in both the first and the second quarter for us.

By April, that was something that we shared with you that we neutralized. Now we've turned it into a strong tailwind. So it's -- the client conversations, it's incremental, it's marginal. It isn't like something dramatically different has happened, but where it's impacting us happen to be areas where we've got 2 agencies in turnaround mode to the extent that this is causing delays, we, therefore, are looking at two things that are, therefore, still not helping us.

And then tech and telco, again, a big category for us. In the long term, we still think it will be a good category to be meaningfully represented in but they're, as I called -- as I said, they're a meaningful outlier when it comes to the sectors for us client-wise.

Okay. And then 2 of your peers this week noted kind of a pause in business transformation work. Wondering if that's something you're seeing is that tech specific? And then how do you view digital transformation over the long term? Is this an area that can be an outsized tailwind for the agencies? Or should we put it in the context that maybe the prior couple of years might have disproportionately benefited from the pandemic acceleration?

One of our peers has a meaningfully larger presence there. And so I think that their line of sight to it is something that everybody will probably learn something from. You've heard from us clearly that when we work with clients, and we show up with data, tech and media offering, we end up in some really interesting conversations that are about solving higher order business problems. And that part of our space or that part of the opportunity set that we're getting or if you look at our new business performance, that part looks like it's still quite active.

Commerce is a place where we're still in build mode to a greater degree. So we probably see less of that. I think there's more to go. We're after one, we've got a commerce lead as we've talked -- we're thinking about how we take a commerce approach actually those commerce labs are around really enhancing all the creative work we do to make it more addressable and more shoppable. So I'd say marginally, but I think that what we heard earlier this week probably has a little more breadth to it in terms of what they're seeing.

And our next question is from Tim Nollen with Macquarie.

Philippe, I wonder if you could help explain something you said and also Omnicom and Publicis said this week, which is that media is very strong, even while creative is weak. I assume your work with data and everything Acxiom does would help with your successes there. But I just wonder why clients are putting a lot of money in the media, but not so much creative.

I'm not sure that, that's necessarily something that is all that new. I mean, I think that if you think about sort of the trajectory, industry trajectory, at least I can speak to ours, so lean in there and what we've built there and the nature of what we're able to do with clients as a result has been accretive to us growth-wise and in terms of margin for a number of years, and it's been a big engine for us over a number of years of very strong growth performance.

So I think that, that's just a continuation of a trend. I think it goes to what you can do when with data, audience-led approaches, something that's very precise and very accountable, you are impacting business outcomes. You are solving for a set of problems that or maybe broader than what we used to be able to be brought in to do. I think that probably, again, feels as if given the uncertainty, but given also just the scale of it, it's something that you continue to do as a marketer. And regardless of whatever volatility there may be at the macro level.

Okay. Could I supplement for Ellen as well, which is that it's great to see the operating income coming pretty strong despite a softer top line. The salaries line, however, was up almost a couple of hundred basis points. I wonder if you could give us a bit more color on why that rose so much and if that's going to level off from here.

Sure. Thanks for the question. Overall, I mean I would point to, as you mentioned, the very strong margin performance in our flexible cost structure working as it should. You saw temporary labor flex down significantly as well as performance-based incentive comp. You also saw severance elevated not only in the quarter and the first half, and we expect to see, as I mentioned in the prepared remarks, those benefits in the second half. Overall, as we reiterated our margin expectations for the year, you should see leverage across the different categories.

Our next question is from Steven Cahall with Wells Fargo.

Maybe first, just to pick back up on tech and telecom softness. Could you maybe help us differentiate a little bit between tech and telecom. I think of those as sectors with pretty different kind of long-term growth rates. If I'm picking up what you're saying correctly, this sounds like it's a bit more tech and telecom, but maybe that's incorrect. So I just maybe love some clarity on the differentiation between those 2?

And is it also correct to think about this as really a U.S. industry vertical phenomenon since I think you tend to talk about your industry verticals on a global basis. Just trying to understand that. And then maybe to pick back up a little bit on Tim's question about media. So I think your media discipline growth did get worse sequentially. You were down about 1% in Q1, down about 1.5% in Q2. And often, we think about this as kind of a canary in the coal mine for where ad spending is going. So could you talk a little bit just about the trends you're seeing in media? And do you think that portends any greater slowdown in broader client activity?

Sure. On the former, again, understanding that client's business and confidentiality around client business is what it is. Yes, I think your read on is that more a tech than a telco set of comments, yes, it is. And it is the case that we talk about sectors globally. But when you think about our revenue mix all in being 2/3 U.S., there would have to be a pretty significant outlier for it not to also apply domestically. So we're definitely seeing it. I mean you see the disproportionate drag on performance that U.S. growth lack thereof had on us so yes, more tech and yes, very much something we're feeling domestically.

On the second question, I don't think that I would read that as you have. The segment was created because we have like entities there in terms of the digital component of what they do, but the impact of those digital specialists was leading to what you're seeing as deceleration. And as we've called out, media is very strong for us, has been and given performance year-to-date in terms of securing new assignments will continue to be. So I don't think I would extrapolate that last piece.

Our next question is from Michael Nathanson with MoffettNathanson.

Two for Philippe, one for Ellen. To beat the dead horse a little bit more. Let's focus on tech weakness again. If you were to go under the hood, I'm sure you've done, when do you think kind of the normalization of spend from those large tech domestic companies will start to normalize, right? So put yourself in our shoes under the hood, when does it ease? Second question would be now that we see another one of your peers showing the size of the principal media buying business, I asked you last quarter. Do you think that is a structural disadvantage that you guys are not in that business. Any update on your latest thinking on that following my question last quarter.

And then, Ellen, just surprised that you guys raised debt this soon at the rates. Your balance sheet is pristine, how did you debate whether you're just paying off the debt when it came due next year versus raising debt when rates not high, but you could wait it a bit. So walk me through that thinking.

Right. I'll let Ellen start.

Sure. So we have, as we do from time to time, hedge interest rates. So the coupon that you're seeing on that debt is the face value or that what was -- what we issued at, but we had previously hedged largely the treasury component of that. So the rates that we're actually paying are better. And when we looked at it from that perspective and looked at the opportunity to take it off the table and then where interest rates are, I had the opportunity to invest as we talked about in the securities, we had a good economic decision.

Two answers, Michael. So as I said, I don't know that we can call the turn on you on tech. And as I also said, our outlook at this point is not contingent on recovery in kind of the rate of revenue change that we're seeing in that space, and that was also having an impact, as we said, on our 2 digital agencies that are in turnaround mode. So not necessarily something that you can sit here where we are. We talk to those clients often. We engage with those clients. It's not that they're not active as marketers and yet they clearly are meaningfully more cautious as marketers. They are often letting folks go who are budget owners whose projects then might sit somewhere or not get actioned at all.

And given the cost cutting that they're taking, nobody is exempt in that part of the economy, but again, think about all the other things we talk about, they're going to enable everything that happens with AI. They continue to undergird pretty significant part of the ad ecosystem. And in another year or 2, we're going to be up to 80% of media being bought programmatically. So there's no sense that it won't turn. It's just they're clearly going through something that is more protracted than any of us thought.

On your media question I thought about it some because you'd asked the last time and I thought Michael will either connect at some point or it will come up here. So media has been a very strong performer for us. It continues to be a strong performer for us. So our model works well. And the question you're asking is, is there something missing, a dimension missing, can it work better. So we are looking at that.

And even Ellen called out severance, we're looking at how we can reengineer processes there and align or further integrate offerings. But if the objective is to deliver value to clients, and we've demonstrated we can do that. And the way that we've done that is by powering it with data, making it about precision and therefore, to my mind, value as greater marketing effectiveness. So for clients whose focus is on other KPIs, which might be efficiency, might be -- we'll call it efficiency. We're looking at ways to evolve our offering to meet those needs because what's most important to us is we've got to meet the needs of as many clients as possible. And if what value means is something that is changing or evolving, or pendulum is swinging on that. We clearly want to be positioned to do that.

So the analytical focus that happens in your space on this issue, we understand for us, it's going to be, are we solving for client needs? Can we show up in ways that regardless of their definition of value, we are a great partner for them. If I were doing the math the way that you guys do, the thing that I still think what matter the most is profit growth in the businesses that we or our competitors are operating in this space and then cash flow. And I hope that, that is at least directionally helpful thinking, but we're definitely looking at it and being pretty thoughtful.

And our last question comes from Julien Roch with Barclays.

One short-term question, one long-term question. On the short term, after being down 1% in the first half in terms of organic you need to be up 3% in the second half to reach the bottom end of your guidance of 1% and up 5% to reach the top end of 5%. So can you break this 4 to 6 percentage point improvement between lapping the Huge and R/GA issues and account wins and three, anything else I forgot. That's the first question.

And then on AI, longer-term question, to put it in terms of simple numbers, if you have a creative budget of 100, you make 15 margin, 85 of cost. Thanks to AI so that cost goes to 60, you keep your 15 margins, so revenue 75. I believe advertisers will reinvest, but do you believe they will invest in creative in which case it's kind of neutral. For media, which actually would be negative because the media take versus media spend is kind of only 5% to 10%.

I'll take them in order because the latter is probably doctoral dissertation. So as I said, we are no longer expecting the turnaround as you put it, right? So our outlook as it stands now, does not factor in either significant recovery in tech and telco. And clearly, the time line on the digital specialty agencies, given this greater uncertainty is pushed. So how the year lays out for us in terms of -- to your point, doing 3.5 plus in the back half, 3.5 to 4 is the drag from tech telco and digital becomes a given. So it's not going to recede at midyear, it will likely be with us for most of the year.

The negative net new business position that we had coming into '23 impacted the first half will not impact beyond that and has now been turned around and is now a strong positive. So if you look at the second half and then in the first half, we had strength of media and healthcare. So if you look at the second half, the growth is roughly 50% from net new business that comes on stream and 50% from stronger underlying performance at those 2 large entities.

And on new business, all those wins bring a significant plus up, but we have not assumed all of it at one go. We have assumed essentially that full run rate for all of those is not in effect until close to the end of the year, which is why we pointed out that clearly, it will have a benefit for us in '24. So those are -- that's a very significant full run rate number, but we're not forecasting that full run rate until late in the year.

And then on media and healthcare, I think our review reflects, Ellen talked about timing on work and campaigns. And then on the media side, I would say, business mix and seasonality. So hopefully, that helps you understand how we are seeing what that 3.5 to 4 for the back half looks like.

On the AI question, which, as I said, I think merits a lot of conversation and is getting a lot of thought. It is early days in the application of it on the creative and content creation side of things. I do think that when you begin to see what's possible given the volume of content that can be created, then it isn't necessarily the case that one is going to replace the other. It's that you're going to be supplementing because you're going to be creating much more and much more complex sort of ecosystems of content.

And then the other thing that we've seen in the businesses where we've already applied machine learning and AI, such as data and media is that as you're able to bring solutions that are informed by this to clients, the nature of the opportunity with them evolves. And so you're brought in to do different things. So you can take some of that young digital talent and upskill it or you can have them focus on areas of client business and strategic problems that are more strategic that are higher value. So I don't know that it will be as clear as what you laid out there. I think we've been all along, the efficiency piece of this will be important.

The new ways of being compensated will be important. But for at least the foreseeable future, we're figuring out what it means relative to the very sort of direct for instance, that you put out there. But it's a concern or at least an issue that we're all thinking to address. I don't have an answer for you sitting here right now.

Okay. Very good. Very clear and thank you for overrunning the opening bell.

No, pleasure. Important questions. We appreciate them. Thank you for the time. We look forward to updating you on progress in October, and we'll get to it.

And that was our last question. I'll turn it back to Philippe for any final thoughts. And this concludes today's conference. You may disconnect at this time.