宏盟集團 (OMC) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Omnicom third-quarter 2005 earnings release. (OPERATOR INSTRUCTIONS). At this time I would like to turn the conference over to the Executive Vice President and Chief Financial Officer, Mr. Randall Weisenburger. Please go ahead, sir.

Good morning. Thank you all for taking the time to listen to our third-quarter 2005 earnings call, especially on this rainy day. We hope everyone has had a chance to review our earnings release. We have posted it and a presentation covering the information that we will present this morning to our website. This call is also being simulcast and will be archived on our website.

We are going to begin the call with some brief remarks from John Wren, and then following John's remarks, we will review the financial performance in more detail, and them both John and I will be happy to take questions at the end.

Good morning and thank you for joining us. We are very pleased with the Company's performance for the third quarter. As Randy will explain in a few moments, all the areas of our business continued to perform well, except public relations which was flat for the quarter and remains positive for the nine months. We followed this and in looking into October so far in PR, this area appears to be back on track for the month.

From a geographic perspective, growth for the third quarter remains very strong in North America, South America, Asia and the non Euro European markets. Growth this quarter improved in both the UK and in France. In Germany and the Netherlands, we were down slightly when you compare it to the third quarter of 2004. Germany, as you know, has been -- the economy has been suffering, and the elections we think impacted this a bit during the third quarter.

Our net new business wins in the quarter were the best in our history, and Randy will take you through some of the more significant wins when he gets to his comments. These new business wins will contribute principally to our performance beginning January 1. We will have some positive impact from them during the fourth quarter.

Finally, we did complete several small acquisitions in the quarter, and we have completed two additional acquisitions since September 30. We continue to follow our long-standing policy of purchasing small and midsize agencies, which are easily integrated and support the growth plans of our existing business platforms.

With that, I will turn this over to Randy who will take you through in a lot more detail. Thank you.

First, as John noted, we are extremely pleased with the performance of our agencies in the quarter both from a financial perspective and the outstanding success that they have had in gaining market share and further distinguishing themselves in the marketplace.

As John noted, this was the best quarter in Omnicom's history from a new business perspective. Revenue in the quarter increased 204 million to 2.52 billion, which was an increase of 8.8%. As a result, revenue for the nine months increased 8.4% to 7.54 billion. Operating income for the quarter was 274.5 million, up 11%. That is in operating margin of about 10.9%, which is a 20 basis point increase over last year.

For the nine months, operating income increased 11.4% to 913.7 million, and our operating margin was 12.1%, which was up about 30 basis points from last year. On a dollar basis, that translates into about $93 million of operating income -- the improvement does.

Net interest expense for the quarter was 16.3 million, up from 8.8 million last year, and for the nine months, net interest was 42.7 million, up from 26.6 million last year. These increases are primarily the result of having to pay sweetener or consent payments during the quarter and at the end of last year on our various convert issues, as well as market increases in short-term interest rates.

On the tax front, our tax rate for the quarter was 33.7%, up about 10 basis points from last year. For the nine months, our tax rate was 34.1%, up from 33.6% last year. However, our nine-months rate is being impacted by the high book tax rate that we had in Q1 on the divestiture of our sales promotion business in Australia and New Zealand.

Absent the impact of that transaction, our year-to-date tax rate would have been about 33.7%, which seems to be our current running rate. Net income for the quarter increased 11.3% to 161.7 million, bringing the nine-month total up to 538.1 million, which was an increase of 10.5% increase over last year. And diluted EPS for the quarter increased 13.9% to $0.90 per share and for the nine months increased 13.5% to $2.95 per share. All in all, a pretty good quarter.

Analyzing our revenue performance a little closer, organic growth was exceptionally strong in the quarter, coming in at 8.6% and accounting for 199.1 million of our revenue growth. There must be something about the third quarter. I think this is the second year in a row that our agencies have done exceptionally well on the third quarter.

For the nine months, organic growth accelerated to 7.1%, which is about 40 basis points better than the comparable period last year and accounted for 496.3 million of our growth. Acquisition revenue in the quarter was a net negative 6.8 million or minus 3/10 of 1%, and for the nine months, they were a negative 25.9 million or a negative 4/10 of 1%. As we discussed before, the negative acquisition growth is due predominantly to the sale of our sales promotion business in Q1 and somewhat to our conservative nature when it comes to our making of new acquisitions.

However, new acquisition activity did pick up a bit in the quarter. As John pointed out, we closed five new although relatively small acquisitions, and we have closed two additional acquisitions in the first few weeks of October. By the first quarter of 2006, we should have cycled through the negative numbers caused by the Q1 divestiture, so I would predict that acquisitions would be positive by then.

FX continued to have a positive impact in the quarter, although slowing to only .5% or about 11.6 million. For the nine months, FX added 113.2 million or 1.6% to our revenue. Based on current exchange rates, we would expect the impact of FX in Q4 to be negative by about 1.9%, bringing the FX impact for the year down to about .6%.

As for our mix of business in the quarter, traditional media advertising accounted for 42.8% of our revenue and Marketing Services 57.2%. For the nine months, those ratios were 43.6 and 56.4% for Marketing Services.

As for the respective growth rates, traditional media advertising grew 11.6% in the quarter, bringing the nine-month total in at 9.3%, and Marketing Services, which continues to be driven by the strong performance of our CRM and health care businesses, grew 6.8% in the quarter and 7.7% in the nine months.

As for the breakdown of revenues, CRM was about 34.7%, public relations 10.2% and special specialty communications 12.3%. As for their respective total growth rates, CRM fared well at 6% in the quarter and 8.2% for the nine months. Keeping in mind that this is the category impacted by the divestiture of the sales promotion businessm and obviously given this is a smaller category, the impact on a percentage basis expands.

Public relations decreased 2/10 of a point in the quarter, bringing the nine-month growth rate in at 2.4%. And specialty communications performed extremely well, increasing 16.3% in the quarter bringing the nine-month total up to 11.3.

Our geographic mix of business in the quarter was 56.6% U.S. and 43.4% international. Our total revenue growth for the quarter in the United States was 167.3 million or 13.3%. Acquisitions totaled 13.7 million of that, and organic growth, again exceptionally strong, totaling 153.6 million.

On the international side, revenue increased 36.6 million or 3.5%. Acquisitions were negative at 20.5 million, again sort of concentrated because of the divestiture of our sales promotion business in Australia and New Zealand. Organic growth was 45.5 million, and FX had a positive impact of 11.6 million.

Moving onto cash flow, our after-tax free cash flow and our primary uses of cash are shown on pages seven and eight of the presentation. Page eight is the condensed version that I will basically use as the model to walk through.

As you know, our business is fairly straightforward. Our primary source of cash and cash flow is net income, adjusted for basic non-cash charges, which for us are primarily stock-based compensation charges, stock option expense and restricted stock amortization, as well as the related tax benefits, and then depreciation and amortization.

In addition, we have a fairly significant difference between our booked taxes and our cash taxes. This is primarily due to the tax benefits associated with our convertible bonds and tax-deductible goodwill amortization.

Working capital is also generally a source of free cash flow; however, due to the large swings in these numbers day to day, internally we typically analyze our cash flow, excluding changes in working capital, which is the way we presented the analysis on page eight.

For the first nine months, our after-tax cash flow, excluding working capital changes and excluding the cash proceeds from the divestitures completed in Q1, was approximately -- excuse me, $289 million more than our net income for a total of 826.8 million.

Our primary uses of cash are also fairly straightforward. First, our CapEx and dividends. Our CapEx is generally limited to furniture and fixtures, leasehold improvements, PCs and servers. For the nine months, CapEx totaled approximately $102 million, and our dividend payment, which is currently $0.90 per share per year, totaled approximately $124 million.

Our next use of free cash flow is acquisitions, which for the nine months totaled $165 million. That is net of the proceeds received on divestitures. Those proceeds were $29 million. Our acquisition activity did begin to increase during the quarter, bringing our investment in new acquisitions for the nine months up to $18 million.

And finally, our remaining free cash flow, we continue to repurchase shares. Year-to-date we repurchased $644 million of our stock, and we also received $83 million of proceeds from option exercises and stock issued under our employee stock purchase plan, bringing the net amount to $561 million. As a result of those stock repurchases, we reduced our diluted average share count for the nine months down to 182.5 million shares.

And on that note, I will open up the call, and John and I will be happy to take questions.

(OPERATOR INSTRUCTIONS). William Bird, Citigroup.

John, I was wondering if you could give us an early read on what clients are saying about '06? And Randy, was there anything in particular that drove the spike in equity income?

Most clients are just going through their budgeting cycles now, Bill, but we have not seen any changes in the real trends that we have been reporting for the last nine months with a couple of exemptions.

Internet spending, and we have quite a significant presence with the various holdings that we have, I expect to increase quite a bit year-over-year, starting in when we get into '06 versus '05. The rest of it is just being able to shift appropriately kind of in an agnostic way from one service to another on behalf of the clients as they continue to grow and focus on their revenue lines.

And the question you asked me, Bill, it was fairly broad-based. Again, it was a pretty good quarter. There were a couple of our larger affiliates had a very good quarter. One was Clemenger. That probably accounted for maybe 1 million or $1.5 million of the year-over-year increase in the equity affiliates line.

By the way, where do you categorize your Internet business?

They would be spread around depending upon where they are out. The one thing with our Internet businesses right now is pretty much everyone of our operations has an Internet capability. The stand-alone Internet businesses I believe are in CRM. So things like Agency.com and Organic.

Critical Mass.

Critical Mass.

If you look at the latest Forrester report as well, on those individual units, which are completely dedicated which just came out about a week ago, you will see that we are very proud of Critical Mass, Organic, Agency.com. Out of 14 companies, I think they evaluated ranked at the very top. So that is helping drive new inquiries, as well as supporting the concepts that there is real traction here.

Lauren Fine, Merrill Lynch.

A couple of questions. One, is there a way that you could quantify net new business for the quarter and versus a year ago? And then I'm curious, it is surprising to me that the third quarter domestically was as strong as it was compared to a very difficult comparison a year ago. If there's any of additional color that you can give us, if there has been a change in how revenue is being recognized or anything of that nature?

And then third, I'm not even sure how to frame the question, but the giving the issues that IPG has had with the media rebates in Europe and other areas of the world, is there any ramification for you all in terms of a change in how you are going to be doing business or any issues you might have outstanding with clients?

Let's take these in order, but I have forgotten the first question.

New business.

Okay, sorry.

New business was right around $2 billion in the quarter. Net new business. And last year it was 950 million. So obviously a big lash -- I'm not sure that quarter to quarter year-over-year quarter to quarter numbers are the best way to compare these things. Obviously it was a great quarter. Yes, I think probably a running 12 months number is probably the way to look at it. Still a good performance.

In terms of the revenue growth, it just continues to be solid. I think it is an example of the portfolio and how we are able to continue to service clients in whatever area is the most appropriate way for them to reach their client base. And it was just a very -- for the second year in a row, the third quarter was very strong.

Last year, which was the first year we attributed in part some of it to the Olympics, obviously we outperformed even that performance, and it just seems to be widespread.

And thirdly, on which I will cover it and then Randy can, I know that Mike Roth and his team at Interpublic have done exhaustive work from reading what they have accomplished in going through over 20,000 contracts, and I think what they reported was that they had issues with 100 of those in terms of compliance with whatever the contract said and whatever was unique to their Company. We have always reconciled and have internal controls in place -- Randy, you want to add anything in terms of the way we are looked at.

We are also the small -- I mean in referring to other things, which are all anecdotal, I think there like in 130 countries, while we're in 30. I think some of those 30 is they reported are places like that we just don't see fit to be in business with because of our client base, and I think they lent themselves to whatever their individual issues were. But they are working very hard to get in compliance.

There is a few things that give us some confidence. One, we perform about 500 or a little bit over 500 individual statutory audits, where in each of those statutory audits one of the first things that happens is the auditors are reconciling revenue to the contracts and making sure that revenue is being recorded in accordance with the contracts.

We also get a significant amount of audit activity by our clients, especially on the media side. I think of our top 25 accounts over 80% of them have done audits of our -- I will say of OMD or OMG of our Media Group within the last 24 months. Many of those audits include multiple years as well. We've got a pretty high degree of confidence that everything is being done in accordance with our contracts, which seems to be the issue that IPG had.

Sure. Just a couple of other things. One is, you asked the question if there was any change in revenue recognition. The answer to that is know. We continue to recognize revenue in the same way that we always have.

The other thing is our sawbucks testing, even though it's not required completely by our auditors to get to be the passing grade that we received, extends down to every entity within Omnicom. Even though the smaller ones in obscure places, you could make a case would not have to be done. We do self testing, then subsequent testing with internal audit and everything else.

So you take all these things, and that is why we are comfortable with where we are and who we are. This question is to the marketplace not a new question at all. I mean the French passed Luesapan (ph) a decade ago. Other markets -- you know, so it sounded like as Mike Roth had explained it, just simply getting his company in compliance with what their contract said.

Alexia Quadrani, Bear Stearns.

Looking at your impressive new business wins, I mean understanding that the main driver behind it is obviously the strength in your agencies, but are there other factors that are contributing to such a robust number? Meaning are there more accounts in play right now? And then what is sort of your outlook of the fourth quarter? Is the pitch activity still very big, and did it look like you might continue the success into Q4?

And then I have a second question on Europe, the weakness particularly in Germany. Do you feel you're going to have to take some more severance in that area, and if you could comment sort of generally on how your profitability in Europe compares the U.S.?

Well, I will take the first piece. Net new business activity continues. I mean new accounts -- we cannot control who puts their accounts into review. So we are invited in most parts to accounts as they are put into review.

And I am far too superstitious to predict our success rate. I do believe in us quite a bit. I believe in -- we bat better than average for the league when we were allowed to get up to be plate. But we have to be invited so we continue to do that work, and I think as these opportunities present themselves, we will continue to perform well.

As for parts of Europe, it is pretty widely talked about in the press. I mean economic environment in parts of Europe is pretty tough. I don't necessarily see that improving anytime soon, although I hope I'm wrong, and I hope there is -- the economies pick up significantly there.

As for our agencies, they are constantly monitoring their staff levels with their business mix. As a result, year-to-date our severance has not really declined year-over-year. We actually expected it to. (multiple speakers).

But so far we are going to continue to have our agencies do the right things to make sure that they try to keep their cost structures in line with the business that they have. And if that business keeps changing, they will keep making the appropriate adjustments. You know, when it is going to stop is when it is going to stop. We cannot really control that.

Sure. I mean I was in Germany I think two times last month -- between this month and last month, right before the -- the week before the election and then last week in Berlin. And I think that had an impact on what people in Germany were focused on, and not knowing the outcome of the government, people just took their foot off the accelerator.

We're very pleased with -- and we have gone through significant changes in two out of our three main operating units in Germany over the course of the last 16 months where I believe we upgraded the leadership in two of our three main units. And we are very pleased with their performance and what they are accomplishing.

DVD, which ranked by the German press in prior years had really not even gotten onto the list, I believe by the leading management magazines and creative magazines will be listed as number two for the first time in about two decades in Germany this year. So I'm hopeful from a quality point of view that we have the right assets in the right places, and we are just adjusting with whatever the current marketplaces are.

So there's a short-term impact on a long-term trend, but we still believe that quality counts, and quality will produce better results over a longer period of time.

Steven Barlow, Prudential.

Following up on Europe, is there a way to size the difference in the margins in Europe versus the whole Company? Are we talking high single digits, mid single digits in that area?

I think they are certainly narrowing. You know, we had a lot of severance (multiple speakers) we had a significantly disproportionate amount of severance earlier in the year and last year in Europe. But, as that is balanced, the margin gap is narrowed. The U.S. agencies are still -- they still have higher margins than Europe, but it is probably a couple hundred basis points.

I mean if you take -- I mean severance roughly for the year is what? (multiple speakers) 60, $70 million. A significant piece of that is coming out of Europe because of the complications of how long you have to pay people when you terminate them. So that has obviously an impact as you right-size or you upgrade management. And eventually when we were happy with the people that we have in place now, so that we are hopeful that, that will abate over time.

Thanks. And then on direct to consumer on the pharmaceutical side, what are you hearing from those companies in terms of ad spending, or is it going up, down or is it just shifting from different venues?

The answer would have to be a generalization because I don't have specific numbers. It really depends on the product category. There has been a lot of difficulty with some drugs this year which have impacted that and people are being careful. I mean our main core strength is in the ethical side and professional to professional conversation, and it always has been. The direct to consumer components, which we have not never been very strong in -- I should not say that -- never been the dominant player, is part embedded in our agencies because they are in the consumer part of the media.

So there are some shifts, but I think dollars get redeployed if you're not broadcasting it on network TV and you're redirecting those funds to the more ethical -- to ethical communications between physicians and health care providers.

I think what we have seen is a slowing of growth, but of coming off of some pretty high numbers over the past few years. So I think it has been still I will say positive growth, although less than last year or the year before.

Michael Nathanson, Sanford Bernstein.

I have a couple for Randy. Could you drill down a bit if it is possible the third-quarter advertising? Was there any categories that surprised you that were stronger than what you expected? And is the beginning -- I know we kind of talked about it -- do you think there is any seasonality going on here that could possibly impact fourth-quarter growth rates, anything pulled forward? And then on incentive comp, I wondered what the growth was year-over-year and the quarter on incentive comp?

Okay. Let's see, the first one as far as categories, I don't have the data at this point in time to say one category over another. I don't have the information. I have not really heard of any categories being the big blowout category.

As far as seasonality, you know, maybe a little bit and maybe also the way our contracts are more and more fee-based, may tend to smooth some of the revenues over the course of the year, which historically Q3 and Q1 are kind of lows. So I'm thinking that Q3 might be getting a bit of benefit of that fee-based smoothing.

As far as pulling forward from Q4, I don't really think there is any signs that I have heard of that it is a pull forward from Q4.

Okay.

It is certainly possible that there is a little bit.

Okay. And then on incentive comp, I wonder if there is any step up on the growth year-over-year in the quarter?

Incentive comp is basically flat year-over-year.

Yes, that is based upon individual performance by individual units that we aggregate that, and it is flat as Randy said.

Debra Schwartz, CSFB.

It seems that this quarter many consumer companies are starting to feel the impact of rising oil prices, seeing a bit of a margin squeeze. I'm wondering if you're hearing that from your clients, and would you expect to see any change in their marketing behavior going forward?

We know that it is a general economic fear for topline non-core inflation that it is pretty obvious that everybody is suffering in one form or another when it comes to energy costs.

I think that most companies are also focused very strongly on their topline. And so it has not impacted us other than in a very general economic fashion along with everyone else. And we have not seen people backing away from the need for revenue growth and, therefore, advertising marketing-related support.

Okay. Thanks and then just a follow-up. Can you give us a little more color on your cost trends? Can you break out salaries from other costs in the quarter and then maybe tell us what Sarbanes-Oxley costs were?

Yes and no. We can directionally do some of it. The salary-related costs -- we are seeing utilization increases. That is why the margins are expanding a bit. We would like to see it obviously pick up more. But in some areas, for example, some of the U.S. markets were the growth rates were very high, the utilization rates have picked up quite significantly. In other areas where the growth rates have not been so strong, obviously the utilization rates are not improving as dramatically.

One area that we have gotten very significant improvements in utilization rates is what we describe as occupancy costs, which includes rent, etc., as well as equipment leasing. So basically our computers and those sorts of things.

Those numbers are actually on an actual basis down year-over-year despite the fact that the business has grown and inflation, etc. So we have done extremely well on that occupancy cost front.

Sarbanes-Oxley costs, there are two components to Sarbanes-Oxley costs. One is the easy one to capture, which is the fee we pay KPMG. The harder number to capture is the internal cost, which is it a combination of staff that we have dedicated to Sarbanes, additional people that we have added to internal audit in support of some of our Sarbanes testing. The system costs that we have used to build our internal -- I will say portals, communication channels, data collection, modules, etc. -- that we have expanded a significant resource in building and designing for a company like ourselves.

And then, frankly, we do a significant amount of testing and training. We have just over 1000 control locations, and at each one of those control locations, we test every control, every quarter. And generally those tests require a multiple of tests, you know pulling invoices or checking records or whatever the appropriate control test is.

So internal staff and time cost is very significant. I had estimated somewhere in the 50 to $70 million range awhile ago. I don't see those numbers really coming down.

Troy Mastin, William Blair & Co.

I wanted to drill down a little bit to see if you could help us understand the strengths potentially accelerating organic growth of the business. Because prior to this quarter, we have not seen unusually outsized new business wins. So is something going on with the industry? Are you maybe seeing your clients shifting budgets to you more quickly than has been the case in the past that just are not evident in new business wins, and will this have any impact on your longer-term expected organic growth rate? So is there some sustainable trend here that you see?

Troy, we -- the answer is I don't know the -- I cannot be precise in responding to you. There is -- we share a strong belief that still is dominates the headlines. Advertising itself and media are still at the core of what clients do. But clients having increasingly diverted budgets in an integrated fashion towards those areas of spending where there is a clear ROI.

That is why, as I mentioned earlier in a question, I'm very hopeful and very confident that Internet spending will increase and probably outpace general spending as we move forward. Because it is in most instances you can get a clear ROI as to what is going on.

But our strengths is the axle of our portfolio and the fact that we can respond to what the clients' requirements are to reach their audiences. And I think that is evolutionary. If you go through periods prior to 2000, it was like a slow ice age. I think since 2000 clients have become more aware and continue to look for new ways to reach the markets that they need to reach. But I don't think anything has displaced anything else, and I think it is evolution not revolution. I wish I could be more precise, but we've focused more on having an appropriate portfolio than trying to monitor individual activity. And I think so far we've done a pretty good job at that.

New business activity has been very good for us. Our agencies have done extremely well. You know, I would not look at any one quarter and say that that is a trend. We had a very good quarter, and we are very happy for it.

I think it is better to look at probably a rolling four quarter set of numbers because one, it takes awhile for the new business wins to get turned into revenue, and it is not -- every account does not get turned into revenue in 90 days or 120 days. I mean it certainly varies from account to account. But we certainly think the new business wins are a definite positive.

Overall as far as organic growth trends, we have said for a number of years that we think we ought to be able to on a long-term basis be able to outpace nominal GDP growth by a couple hundred basis points. You know, I don't think anything on a long-term basis changes that dramatically.

The only other thing I would add, Troy, is we remain as evidenced by the awards we get in just about every area on the quality of the assets that we have in the portfolio, and we believe that even as categories don't grow, if you retain the leaders in a particular area, you will attract market share. So it is a dual strategy of making sure that you have the correct portfolio and having the best in leaders in that -- in the various areas that you have invested in. Because you will either get growth because clients are shifting or you will get additional growth because of market share gain when quality becomes a determining factor for this. And it is evidenced in things that I mentioned -- we mentioned in the past. Our continual performance in the ad sector with comm and every other ward that there is.

I mentioned Forrester a moment ago. If you went back and read the Forrester report in 2000, you would find that some of the assets that we had then were ranked at the top and some were ranked very close to the bottom. And then if you turn around just four or five years later and look at what we have been able to accomplish, we are in leadership positions of all those that survive the consolidation of that industry, and quality is at the core of what we determine to keep or continue to invest in the portfolio, as well as clients' requirements.

If I could do one quick follow-up on your comments regarding Internet spending. It has obviously been strong this year, and John, you made it sound like you might believe it is accelerating at least among your clients. I wanted to clarify that if you think it's going to be accelerating, and do you feel like you need to do anything in order to capitalize on this growth in terms of the portfolio? Can you give us any idea how much of your business might be related to interactive marketing as a percentage of revenue perhaps?

I do believe that the growth rates for Internet, albeit a smaller base, will continue to outpace overall growth for the entire sector of marketing and advertising spending. That is a firm belief that I have held for a long time. We are starting to see it for the first time.

As clients use it and use it effectively, they gain more confidence in it, and they continue to expand their growth.

In terms of do we have more to do? Always, always. You can see it in some of the smaller acquisitions even that we made in this quarter, we're moving closer to looking at the impact that mobile access to the Internet will have in continuing to learn and make investments.

We also make investments in these areas which are not purchases of companies where we are adding talent and capabilities to our existing companies which are very strong. Is there more to do? There will be more to do everyday that I remain employed here because it is a growing and expanding and redefining area.

One of the things that John said that is important and it makes capturing some of the numbers for number's sake a little bit more difficult, the Internet is a medium that all of our businesses use in every discipline. It is not -- it -- the Internet is not an industry from our perspective. It is a medium that we can use in new and creative ways.

So the ad agencies, the PR firms, the direct marketing firms, the promotional marketing firms, everybody has an Internet capability and is doing some extension of their business into the Internet. So that means we are -- it is not a matter of going out and setting up stand-alone units, although some of it is that, too. You have the Organics, the Agencies, the Critical Masses. You have the specialty firms, but we also have every other firm utilizing the Internet, and it is becoming a meaningful piece of our overall business because it's an important medium and is going to get more important as we go forward.

But no ballpark estimate of what the revenue is?

I don't have one. I mean it is easy to break out what the Agency, Organic, Critical Masses are. But that really dramatically underestimates what our total revenues associated with the Internet are. I think -- and maybe we will take a stab at it for next quarter. We will see if there's a way to come up with some reasonable numbers, although it won't be an exact science, and try to get people to allocate revenues that they are getting on contracts to the Internet component from, say, the regular PR component. But I think these things are so integrated now that that is difficult to do.

I think we have time for one more call.

Paul Ginocchio, Deutsche Bank.

Just a quick one. Can you quantify maybe the margin impact of all that net new business wins in the quarter? Was it detrimental and if so how much? Thanks.

I don't think the net new business wins in the quarter -- we would not have had any -- those were wins in the quarter. I don't think the -- there certainly won't be any revenue or anything coming from those accounts probably until the very end of Q4 to the beginning of Q1 of next year. I mean there may be some bids. There were probably some pretty significant costs associated with supporting the wins and the pitches. It is not something that we collect and --

We don't look at it and we certainly don't analyze that versus our success on a quarterly basis because, as Randy said, you have the new business is part of the lifeblood of the organization. So people are constantly making investments as the opportunities come up, and you worry about the success of them. So yes, we have that. (multiple speakers)

PetroAmerica (ph) is the only real windmill we are expecting some revenue from in November and December. The rest of them, because of the 90-day cancellation clauses which are classic as a minimum in the business, says that once you get your notification, you don't really -- you don't -- the winning agency does not -- there is normally a quarter lag between the reported wins and win revenue in most instances starts to occur.

And we are somewhat caught in our same trap that I try to warn people against. We are talking about -- in this quarter, obviously we had a great net new business quarter. What makes it great from good is the fact that we have a few very large wins.

What makes every quarter a good quarter is the fact that we have 1000 agencies out chasing new business, as John points out, as part of their lifeblood everyday, and most of those wins and those losses are relatively small. Maybe even very small by most of our standards. But, frankly, it is that hard work on those small accounts that really makes a difference. Every quarter that base is there, and that is generally hundreds of small wins because, frankly, with 1000 locations, if each place wins one piece of business, you know you would have 1000 new business wins, and some of those places will obviously lose some business. They have a bunch of losses as well. Capturing the cost of every new business pitch as such would be virtually impossible.

And the other overlooked component of this is its net new business wins. So it is not always just what you win, it is also what you protect, and you don't lose outside the group, which contributes to the long-term success in this area.

Okay. Just a quick follow-up. Because of the amount of new business you have won this year, does that make it harder for you to achieve your sort of normal margin improvement that you're looking for every year?

No, new business, basically the big driver to margins is utilization rates. So to the extent we're winning business and because of that one business able to improve our utilization rates, margins will rise. Obviously with every piece of business, there is some cost component to winning that business. Hopefully that probably does not spike much one way or the other. Hopefully people are out focusing on new business all the time.

To the extent that business is one in place, obviously there's obviously some additional staff cost and other things required to support it, but hopefully we get some utilization benefits with the senior creative people, the finance people, the new business people, etc. on real estate etc. Obviously if the wins come in places that are already at peak utilization, then the increment on margins won't be quite as strong because we will have to add staff and real estate and everything sort of wholly to support that account. So that is generally rarely the case.

Sure. And just since you asked the question to the many employers of Omnicom and probably the leaders of some of my more significant units who are probably listening to the call, we continue our focus on to be on winning new business and retaining the business that we have and as opposed to acquiring growth. And that has been a philosophy that I think is embedded in just about every one of those a thousand reporting units that Randy talked to, the need for them to go out to grow their businesses, not only for us and the shareholders, but in order to retain and attract the very best people in the industry because an entity that is growing can create opportunities for the best talent. And entity that is stalling can't. And so that was not as directed towards the analysts as it was towards any of our own employees that might be on the phone.

Thank you all for taking the time to listen to our call and have a good rainy day. Bye.

Thank you very much. And, ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's Executive Teleconference. You may now disconnect.