宏盟集團 (OMC) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good morning. Thank you and welcome to the Omnicom fourth quarter and year-end 2005 earnings release conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If you need assistance during the call, please press the star followed by the zero. As a reminder, this conference call is being recorded.

At this time, I would now like to introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead, sir.

Thank you. Good morning, everyone.

I'd like to start by giving the good reminders. Remind everyone that forward-looking statements and other information that is included on Page 1 of our investor presentation will contain certain statements discussed today may constitute forward-looking statements.

These statements are present expectations. Actual events or results may differ materially. We undertake no obligation to update or revise any forward-looking statements.

Now with that said, thank you, all, for taking the time to listen to our fourth quarter 2005 earnings call. We hope everyone's had a chance to review our earnings release.

We've posted it at a presentation covering the information that we'll present this morning to our Web site. This call is also being simulcast and will be archived on our Web site.

We'll begin the call with some brief remarks from John Wren. Then following those remarks, we will review the financial performance in a little more detail and then at the end of the call, both John and I will be happy to take questions.

Good morning. Thanks for joining us and happy Valentine's Day.

2005 overall was an outstanding year for Omnicom. Our agencies continued to gain market share, setting a record 5.5 billion in net new business.

The good news is a significant number of these wins actually came late in the year and will benefit our growth in 2006.

In the fourth quarter all of our markets, except for The Netherlands and South Africa showed positive growth. For the year, we had positive growth, except for Africa, which is not a very significant part of our revenue base.

Many of you might have read the trade press yesterday, which reported on our ability to keep business in the family. What wasn't reported is the great job that our team did, especially in western Europe this past year, retaining important accounts, which were put into review during the year.

Our strategy of staying focused on having the best talent in the industry and making investments in their education and development, I believe, are really paying off. As we examine our efforts around the world, we're making significant progress in Asia since posting Michael Birkin out there as the CEO of Omnicom Asia in April.

I fully expect that over the next 18 months, Omnicom will be in a strong position in all those markets and certainly as strong as our competitors and consistent with the strength that we show throughout the rest of the world. 2006 also marks Omnicom's 20th anniversary and I expect it to be a strong year.

With that, I'll turn this over to Randy.

Thanks, John.

Let me repeat, 2005 was an excellent year. We're extremely pleased with the performance of our agencies, both from a financial perspective and the outstanding success they've had in gaining market share and further distinguishing themselves in the marketplace through their unparalleled level of creativity.

As John mentioned, as a result, 2005 was a record new business year with net wins of just over 5.5 billion, and with many of those wins coming in the third and the fourth quarters, which hopefully will give us a nice tailwind going into 2006.

Going to the numbers, revenue in the quarter increased $150 million to 2.94 billion. That was an increase of 5.4%. As a result, revenue for the year increased 7.5% to 10.48 billion.

Operating income in the quarter was 426.1 million, up 7.9%, and operating margin of about 14.5%, which is a 30 basis point increase over last year. For the year, operating income increased 10.2% to 1.339 billion, with an operating margin of 12.8%, also about 30 basis point improvement over last year.

Most of our operating leverage in 2005 came from continuing improvements in the utilization of our infrastructure costs, as well we continue to restore incentive compensation programs, as well as completing the shift away from stock options to more cash-based plans.

In addition, over the course of the year, we further increased our investment in our training programs and as we previously announced, we significantly ramped up our investment in developing our business in both China and India.

Net interest expense for the quarter was $16.5 million. That's up from $10 million last year. For the year, net interest expense was 59.2 million, up from 36.6 million last year.

These increases are primarily the result of having to pay larger sweetener payments on our various convert issues, as well as year-over-year increases in short-term interest rates.

On the tax front, our tax rate for the quarter was 33.7%. That's up about 10 basis points from last year.

For the year, our tax rate was 34%, up from 33.6% last year, and our annual rate is being impacted by the high book tax rate related to the divestiture of our business in Australia and New Zealand that occurred in the first quarter. Absent the impact of that transaction, our year-to-date rate would have been 33.7%, which at this point looks to be a reasonable estimate for 2006.

Net income for the quarter increased 6.8% to $252.6 million, bringing the full year net total to 790.7 million, which was an increase of 9.3% over last year. Diluted EPS for the quarter increased 10.2% to $1.41 per share, bringing full year earnings to $4.36 per share, or an increase of 12.4%.

Analyzing our revenue performance a bit, organic growth was extremely strong in the quarter, coming in at 7.6%, and accounting for 213.1 million of our revenue growth.

For the year, organic growth accelerated to 7.3%. That's about 70 basis points better than last year, and it accounted for 709.4 million of our total revenue growth.

Acquisition revenue was marginally negative at $2.8 million, or 0.1% in the quarter. For the full year, acquisitions were a net negative 28.8 million, or about three-tenths of 1%.

As we discussed before, and you'll hear this a few times throughout this presentation, the negative acquisition growth is due predominantly to the divestiture in the first quarter of a business in Australia and New Zealand. However, during the second half of 2005, acquisition activity picked up a bit and in Q4, we closed some seven small acquisitions.

Going into 2006, the negative impact of that divestiture will cycle away and the positive impact of new acquisitions will become more impactful.

FX had a negative impact in the quarter of 2.1%, or about $59.9 million. For the full year, FX was marginally positive adding 53.3 million to our revenue, or one half of 1%.

Based on current foreign exchange rates, we would expect the impact of foreign exchange in Q1 to be a negative between 2.5 and 3%, and then improving as the year goes on, to maybe something like 1.5 to 2% negative in Q2, maybe a half to 1% negative in Q3 and flat in Q4.

Obviously, those estimates are based upon today's exchange rates continuing. They will obviously change.

As for our mix of business in the quarter, traditional media advertising accounted for 44.4% of our revenue and marketing services, 55.6%. For the full year, those ratios were 43.8% advertising and 56.2% marketing services.

As for their respective growth rates, traditional media advertising grew 8.6% in the quarter, bringing the full year rate to 9.1% and marketing services, which continues to be driven by the strong performance of our CRM businesses, grew 3% in the quarter and 6.4% for the year. Keeping in mind once again, the divestiture in the first quarter was in the CRM category, reducing our total growth rates in both the marketing services area and in CRM.

Breaking down marketing services revenues for the quarter, CRM was approximately 35.1% of our revenue, public relations, 9.1, and specialty communications, 11.4. As for the respective total growth rates, CRM was up 3.5% in the quarter, 6.8% for the full year. Again, this category was negatively impacted by the divestiture.

Public relations grew 1.3% in the quarter, 2.1% for the year, and specialty communications increased 2.7% in the quarter and 8.9% for the full year.

Our geographic mix of business in the quarter was 53.6% U.S. and 46.4% international. In the United States, the total revenue growth rate in the quarter was 133.6 million, or 9.3%.

Acquisitions added 16.9 million of that growth, and organic growth was very strong, totaling 116.7 million.

On the international front, revenue increased 16.8 million, or 1.2%. Acquisition growth was a net negative 19.7 million.

Organic growth was much improved in the quarter, up 96.4 million, and FX had a positive impact-- or had a negative impact of 59.9 million.

Cash flow, our aftertax free cash flow and our primary uses of cash are presented on Pages 7 and 8 of the investor presentation. Page 8 is the condensed version. That's pretty much the version that I'll walk through.

Our primary source of cash flow is net income. Adjusted for basic non-cash charges, which for us are primarily stock-based compensation charges, such as stock option expense and restricted stock amortization, as well as their related tax benefits, and then depreciation and amortization.

In addition, we have a fairly significant difference between our book taxes and our cash taxes. This is primarily due to the tax benefits associated with our convertible bonds and a 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 generally analyze our cash flow excluding changes in working capital, which is the way we've presented it on Page 8.

For the year, our aftertax free cash flow excluding working capital changes and excluding the proceeds from asset sales, totaled 1.169 billion and exceeded our net income by some $378 million.

With that cash, we have four primary uses. First, our Cap Ex and dividends.

Our Cap Ex is generally limited to items like furniture and fixtures, leasehold improvements and basic PCs and servers. For the year, Cap Ex totaled 162.7 million and then dividends, our dividend payment totaled $164 million for the year.

During the fourth quarter of 2005, our board declared a $0.25 quarterly dividend. That was an increase of 11.1% over previous quarters of $0.225.

Yesterday, our board also declared a $0.25 quarterly dividend payable on April 6 of 2006 to shareholders of record on March 9th.

Our next use of free cash is acquisitions, which for the year totaled $268.6 million. Net of proceeds that 268.6 is net of proceeds received on divestitures.

And finally, we use our remaining free cash to buy in shares. For the year, we repurchased 731.8 million of our stock.

We also received 88.1 million of proceeds from option exercises and stock issued under our employee stock purchase plan, bringing the net repurchase amount down to 643.7 million. As a result of those repurchases, we reduced our weighted average diluted share count by about 4.8 million shares, bringing the weighted average total down to 181.8 million for the year.

I think our actual share repurchase total for the year was just over 9 million shares.

Now on, that positive note, John and I will be happy to take any questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question this morning comes from the line of Steven Barlow with Prudential. Please go ahead.

Thank you.

Randy, could you just give us what the sweetener payments were in the fourth quarter and what you think they might be for 2006? Obviously you did need to pay some the other day.

Secondly, do you have a forecast of what your organic revenue growth might look like in 2006 based on the 5.5 billion of net new business wins? Thanks.

Let's see, the sweetener payments, the sweetener payment in Q1 was, think it was 46.25 per bond. That was an increase over the sweetener payment on that same bond we paid last year.

As for interest rates, based upon where short-term rates are at right now and based on the sweetener payments that we've made and how they carry out over the course of the year, we would expect our net interest expense to go up to, you know, in the range of about $100 million for next year from the $60 million this year.

As far as forecasting the sweetener payments, in July, in that $100 million is a forecast that there would be an increase in those payments. Again, that's largely driven off of what's happened with short-term interest rates.

As for organic growth in 2006, we really don't provide forecasts. You know, we think the markets right now are steady to improving.

Fair enough. Thanks.

Thank you.

Thank you. And we have a question then from the line of Jason Helfstein with CIBC World Markets. Please go ahead.

Thanks.

Can you perhaps talk about your margin target, then, for '06? Would you expect kind of this was a good margin quarter for you guys year-over-year, would you expect further margin improvement in '06 or flat margins?

And then just secondly, assuming I did my math right, it looked like your aftertax free cash flow, the number you talked about on a per share basis was like 643 and it increased about 4.5% a year. And I think you guys had said that this was a very good year for you both the organic revenue growth shows that and the margin improvement.

So I guess the question is, you know, if this was-- if you deliver 5% free cash flow growth per share on one of your best years, perhaps do you think it makes sense to increase the dividend to just pay out, you know, more capital to shareholders if it's getting harder for you guys to perhaps drive growth through acquisitions? Thanks.

There was a couple of questions in there, so-- and I didn't write down fast enough so could you--

Sure. So just first was about margins.

Is there-- are you prepared to talk about perhaps your '06 margin targets? Should we expect flat margins? Should we expect another improvement in margins? And if so, could you quantify an improvement in margins? And second, about dividends.

Okay.

We don't forecast margins, but we fully expect margins to improve. The reason that we don't forecast margins is, well, one is we don't forecast anything, but the primary reason is that we want to achieve efficiencies through our operation, controlling our costs and growing our revenues.

We don't want to drive unnatural behavior down into our companies, and since we are so dedicated and we spend so much in, saying training and development, for instance, if we were to set margin targets, the people responsible at lower levels would cut what wasn't immediately needed, you know, in the quarter or in a year, which is contrary to our strategy.

So for that reason, we don't attempt to forecast our margins because we want them to behave in a fashion that's consistent with our overall strategy towards quality, because we think quality is going to drive gains in market share and gains in market share are going to drive improvement in the company.

And so we're not-- it's very important that margins don't get forecasted in terms of running an organization like this. But we fully expect them to improve as we go throughout the year.

Okay.

And then a question on dividends and then I think everyone probably usually likes to ask you're guys what seeing as far as client budgets, but my dividend question was just that this was a very good year for you guys and on a per share basis your free cash flow grew about 5%, so perhaps would you think about perhaps increasing your dividend? Is that something you guys have thought about, you know, a higher yield than perhaps like 1, 1% or so, where it is today?

Well, I think Randy outlined what we use our free cash flow for and I think if you were to go back and examine the last three to four years, we did precious little in the way of acquisitions. We have a focus on the 30-odd business platforms that we have.

With the silly money that was out there in the past 18 months from, you know, investment people who were willing to pay almost anything to get into the area, seems to be on the wane and these targets are becoming more realistic in terms of what our willingness to pay for them is.

As we go through the year and we examine what we're doing, we think that we've struck a pretty good balance between the repurchase of shares, acquisitions and what we're willing to pay for them, and our board-- the decision to increase our dividend, which we did do during the year, is a decision for my board of directors, which they periodically look at.

Okay. So basically, so in that your answer, you were saying that you're seeing less competition for acquisition targets perhaps that will be a greater use of free cash flow in '06?

Yes, we expect acquisition activity to continue to pick up. It picked up a bit in Q4 as well. Your cash flow analysis, also there are a couple of anomalies in it that are probably worth mentioning.

I mentioned in my opening that we've shifted a lot of our compensation programs away from stock and option-based expense to more cash-based expense. You can see the cash flow forecast is a reduction in the stock-based compensation.

The second factor in there is depreciation and amortization, which those year-over-year numbers are about flat, as is our Cap Ex. As our business grows, we've been shifting our investments to more lease-based programs.

We're leasing more of our computers and software. We obviously lease our office space and those sorts of things.

So it has a little bit of an impact on some of those cash flow numbers. I think our cash flow has really grown much more in line with our net income growth.

Okay.

And last thing, I apologize for being so long, just, John, do you have a comment as far as what you're seeing for client budgets for '06 compared to '05?

With the exception of the auto industry, I see a fair amount of bullishness in, you know, from what we've talked about with our clients, and it's really the total marketing budget, which is not simply advertising.

It's both marketing services and advertising, and we are extremely well positioned in the advertising agencies that we have, they all have terrific leadership. They all win everything in terms of peer review and we think that we'll continue to gain market share in that area.

And then marketing services, which are really undefined, we are extraordinarily well positioned to take advantage of shifts in budgets, shifts in spending, especially as we get into things like the Internet and things that we'll be doing more in that area in the second quarter as well, and I would think that most of our acquisition dollars this year are going go regionally to Asia and specifically to supporting CRM and Internet-related type of investments, which have a more proven ROI and are more reflective of, I think, how clients are thinking moving forward.

Thank you.

Thank you.

Thanks. We have a question then from the line of Alexia Quadrani with Bear Stearns. Please go ahead.

Thank you.

John, if you could expand a bit on your comments on the auto category in terms of you saying that the budgets and how they look, I guess both domestically and internationally.

And then my second question would be if you could ball park maybe the amount of revenues, both marketing, I guess mostly marketing services coming from Internet-related advertising work you do and maybe talk about the growth you're seeing there and what type of competition you face.

And then just lastly, if you could maybe touch on the public relations segment and if you expect to see a pickup in 2006 in that area.

Okay. So the three questions, the first one being--

Auto.

Auto. You know, the auto industry, especially the domestic auto players are suffering, and they're making reductions within their own companies. And we're also making some staff reductions in those areas.

The interesting thing about that is we're not, I mean if you read, I guess, AdAge yesterday it talked about anticipated cuts in one of our Detroit offices.

We haven't been asleep at the switch. We've had a program in place for over six months where we haven't been filling new jobs, so a number of the cuts that make headlines aren't real people.

They are open positions that we've anticipated because, you know, the struggles of the auto industry haven't-- they're not surprising us. So they're continuing to do what they have to do to adjust their business and as good partners, you know, we're adjusting with them.

If you take our largest client, DaimlerChrysler, we've been with them since 1926 and so that's-- whatever that is, 80 years, and we've had great years and we've had some tough years, and we can well absorb being a great partner with them as we move through this process.

In terms of the international, some of the Japanese companies are facing different challenges, but are growing. So it depends on who you're talking about within the auto sector. But domestically, it's certainly more challenged than outside of it.

In terms of Internet-related, Alexia, that's everywhere. We have embedded in just about every one of our operations an Internet component and we haven't tried to segregate that because it is part of the integrated solution in spending our clients' money wisely.

What we're looking at for later on in the year is aggregating our purchasing power, just from a pure buying point of view, and those discussions are internally happening because I think if we're able to aggregate, we'll demonstrate that we buy a good share of what's spent in the Internet and we have-- we're well positioned to make investments to even grow that further and faster. But it's embedded in every one of our units.

When you look to the specialty companies that are in that area, if you look at the last Forrester report, it ranked only 14, which is a big shift since 2001 specialty Internet companies, and I think we either own, I think we own 5 of the 14, including the top rated ones, and one of the 14 was an in investment of ours. So our investments in 1996 have really paid out very well for us and we're very well positioned, both on an integrated basis and on a specialty basis to move with our clients' requirements in this area.

And your third question was public relations.

Yes.

I probably need Randy's help a little bit on this one. They were up against pretty tough comps, you know, in 2004, and certain new, you know, some PR aspects generate a lot of money when there's new product launches as opposed to in advance of that and there's no specific reason or specific company in our portfolio that I'm troubled with.

We're just, we're working through the growth issues, but there were tough year-over-year comps in that area, especially in the fourth quarter.

And the quarter's kind of been up and down over the course of the last year or two. I do expect that the category will continue to improve from the fourth quarter levels as we go through next year.

Thank you.

Thank you.

You're welcome.

Thanks. And we have a question then from the line of Lauren Fine with Merrill Lynch. Please go ahead.

Great. Thank you. Just a few quick questions.

John, your comments about [inaudible] deal in Detroit. Should I take that that the head count reductions won't result in higher than average severance in the first quarter? And then I have some follow-ups.

We're not expecting higher than average severance in the first quarter.

Okay.

And then, Randy, I don't know if you could quantify what the impact of FX had been on actual EPS in the fourth quarter.

I don't know it off the top of my head. If you give me a couple minutes, I'll see what I can do and we can go on to other questions and we'll try to find the answer.

All right. I'll sneak in one more then, to stall.

John, I'm not showing your prepared remarks you went into as much detail as I might have liked on which countries actually started to perform better in the fourth quarter. I heard which ones were still negative.

And then as you look at 2006, recognizing you don't want to provide a forecast of organic revenue growth, where would you expect to see either stabilization, improvement or deterioration in trends around the world?

Specifically, the areas that we've talked about in the last, I guess, 12 to 16 months was weakness in growth in the euro countries and we saw a turnaround in-- that was primarily where we saw the softness over the last 16 months. We saw our, a positive turn on year-over-year comparisons of growth, not to the level of the U.S. or Asia, Lauren, but certainly a positive trend.

And what I did mention was this year in many of those markets, England and France, we had to repitch some of our largest clients and our teams, which were primarily led by women, who are incredibly competent and have done an extraordinary job in some of our larger units in western Europe, did just a heck of a job in retaining those clients. And so if the trends continue in England, Germany, some of our bigger countries, France, I'm positive that for the first time they're going to start to contribute to our overall growth.

I see Asia continuing to expand, especially over the next two years. We don't have some of the acquisitions were planned, finished and announced in the fourth quarter of this year, but we're in the process of cleaning up due diligence on some of those, so you'll see some moves.

If not in the first quarter, probably right before we get, around the time we get to make the conference call for the first quarter. So I'm pretty bullish.

South America continues to be strong and the U.S. for us continues to be strong with the one exception of, you know, the auto industry, which I talked a little bit about. I don't know if that was responsive.

No, that was actually very helpful. I guess just one last question.

On new business, are you seeing any particular changes in the competitive landscape, you know, it looked like maybe some of the [inaudible] public agencies are showing up more in pitches and there's always some hot issue in the industry with one agency. But in general, are things changing in terms of the competitive tenor of new business?

No, I, you know, not really. I think that we're getting recognition that we have the best quality agencies and we're getting more integrated every day, but legitimately integrated in terms of bringing advertising will remain, I believe, at the core of where clients spend a lion's share of their money, but more and more money is getting diverted to measurable ROI type of activities, the Internet, CRM and those things.

There's been a great effort, which we can demonstrate now very clearly with case studies where we've been able to do that and it's really an accomplishment which took 20 years, but the one that is moving forward very rapidly. And that makes us-- when you have quality across the board, where you have, you know, these three strongest agencies and they're all very, very strong, and then you have outstanding national agencies, that gives us, even though there's an Omnicom and there's three other competitors, which for financial purposes we look at, when you get one level beneath that and you look at the quality of our holdings and, you know, how many quality holdings I can put up against the client versus some of our competitors, I think that's adding and benefiting us quite a bit.

Great. Thank you.

To answer your question on FX impact in Q4, it was between-- isolating that as if it was the only factor is between 2 and $0.03 per share.

Great. Thank you very much.

Uh-huh.

Thanks. And we have a question then from the line of Deborah Schwartz with Credit Suisse. Please go ahead.

Hi, thanks.

I was wondering if you could tell us what you're seeing from the Olympics and what you'd expect it to add to Q1 growth?

Well, we would historically tell you, I think we've been pretty consistent with this for years, you know, I don't-- we don't expect the Olympics to, you know, change revenue growth or revenues significantly. It's just not-- it's not going to move the needle dramatically for us.

I think in total, you know, you, if you add the Olympics and then later on in the year, euro and euro land, the World Cup, this is a good year with a lot of activity, but clients do spend more and the ones that support those events, but in many cases it's a reallocation of budget as opposed to a dramatic increase simply for those events.

Okay, thanks.

And then I was also wondering if you could comment on what you're seeing in India, what your strategy is there and what type of growth you saw in 2005?

India, we're in the process of making several acquisitions and there's probably not our strongest market.

India, for us, is a very small market. So while we may have substantial growth in it in 2006 on a percentage basis, it's a pretty small market for us with several of our networks having affiliates in the market as opposed to consolidated subs as well.

So I don't suspect-- the growth in India, while again, it may be substantial on a relative basis, I don't believe it's, you know, it's not going to be a major driver to our performance in 2006.

That's why I gave myself 18 months to get us up to our punching strength in the way that we're moving and the clients that we're winning, and I believe we'll continue to win. I'm expecting that to grow and we'll wind up in a much stronger position as we continue to focus on that geographic area because we've deployed the assets and we're investing the money in the management out there that are completely and totally focused on that region.

Okay. So then within the brick markets, where is your biggest focus?

I would say China is probably at the moment the largest market. But you have Korea, where we have a very strong position and we're making additional investments, and Russia. India--

And don't get us wrong, the growth in India was quite strong. It was probably 15%-plus for the year.

Several of our agencies' position there is through affiliates so the revenues are not consolidated so while their position from a serving a client perspective is covered, it's not tremendously impactful on our overall revenues. But that, again, is something that we intend to focus on and change over time.

But not to give the wrong impression. We think we can achieve our objectives of growth without being held hostage.

We have always been extraordinarily disciplined in terms of what we're willing to pay for anything in any market and that's not going to change irrespective of our objectives.

Great. Thank you.

Thank you.

Thanks. And we do have a question then from the line of Paul Ginocchio with Deutsche Bank. Please go ahead.

Yeah, thank you. Just a couple quick questions.

Could you just talk about in the fourth quarter were Lowes and Bank of America in there for the full quarter and if they weren't, how many months were they in there?

Second, can you just talk about the search business? I know you made an acquisition in the fourth quarter. Can you talk about the percentage of your clients that you're doing search for, where you're agency of record and then also sort of a follow-on from that, percentage of your clients where they have a different digital agency of record than-- agency of record and what the trends are related to that?

And finally, I think you gave incentive comp a year ago. Could you just update us for this year as well? Thanks.

Again, I'm, I'm--

We can't write as fast--

One of our guys can.

I think you asked about Lowes. I'm not certain. There wasn't much, if anything, in the fourth quarter.

B of A, I think we had one month of revenues in the fourth quarter for that.

In terms of search, you're talking about our acquisition. I don't know. It's a small company. We bought it to expand it, but we're going across-- we don't have the information, as I said on the call.

But I mean the number of clients that we have, that we are agency of record in for search, you know, on a percentage to our total clients is very small, which is, you know, it gives us a lot of potential in some of these acquisitions, some of the reasons why we do them and some of the reasons why people want to join the Omnicom Group is to really have better access to penetrating that client base.

So just so I'm clear on that, you're not doing search for many of your clients?

Well, we 5000 clients, so when Randy says percentages, you know, they cover the globe. It's not a-- the answer to the question is we don't know because we haven't tried to capture that data.

What we're doing in search is we're making investments. We're learning. We're making decisions as to whether to make additional investments or, you know, acquisitions and/or to invest money in some of our existing assets and data centers and to enhance our capabilities.

And that's a process we're going through in the first quarter right now, and we don't get that granular in terms of the detailed information. So I couldn't give you an honest answer because we haven't asked our people to provide us that level of information.

And cash compensation, cash incentive compensation year-over-year was up about 12 or 13%.

Randy, if I could, just a follow-up on the sort of digital.

What are the trends you're seeing with sort of digital versus, is there still people putting out digital agency records or are they bringing it more in-house? I know you integrated most of your digital agencies, is that what you're clients are doing as well within the overall media mix? Thanks.

From what I can gather, it's mixed. Clients will, some clients will name agencies, you know, digital agencies of record, depending upon what their programs are.

Sometimes that will be the same as their agency of record. Sometimes it's not.

And, you know, these trends are moving very rapidly. I mean, you're going to-- within a relatively short period of time, you're going to see them, I think the merger of TV and, you know, the net and things that are produced for specific companies, and we're well engaged in that strategy of people looking at it all the time and our style has been to make investments under DOS in areas that are of interest to us, learn, to figure out how it applies to our clients and where we can deploy it.

And once we've decided that we're, we've learned sufficiently, then we get aggressive in terms of building out more of those assets, either through building them and making investments, which run through our P&L or acquisitions if they're available.

And we try to set ourselves up the way the clients, you know, hope to buy the services. Not every client is organized the same way, so we certainly don't try to limit ourselves in thinking that there's only one way to go about doing it.

Okay. Thanks very much.

Thank you.

Thanks. And we have a question now from the line of Troy Mastin with William Blair and Company. Please go ahead.

Thank you.

Wanted to dig in a little bit to the marketing services growth over the last couple quarters. I know you've got the divestiture in Australia, New Zealand and tougher compares in public relations, but I suspect that marketing services still may have grown a bit more slowly than advertising over the last couple of quarters.

Is that true? Does this surprise you at all and can you give some insights as to why this may be happening, if it's temporary and the outlook for the relative growth rates between marketing services and advertising going forward?

Well, I think our advertising is market share-driven, number one. We're winning quite a number of new businesses.

I'm not quite certain. It comes in as a new business win, you know, because the advertising agency led it and as you get through the contracts and the actual experience and the media planning function, some of these dollars get diverted to marketing services based upon what the client's trying to accomplish.

We continue to grow at a very strong pace, given the marketplace and given the fact that we haven't done acquisitions to speak of. Randy mentioned that we spent $200 million in acquisitions, but only 78 million was spent on new acquisitions. The balance of that money was spent on paying earn-out payments.

So that pace is going to pick up and since we have the best advertising companies in the world, I don't expect us to be spending a lot of money on advertising, pure advertising companies. I expect us to be making investments in CRM and in Internet-related operations.

You know, going back to an earlier question, some of the leading companies, when you look at mobile applications for the Internet, are based in Korea. They're not based in the United States. They're based outside the United States.

Recently, China, which, you know, doesn't allow people to vote, had a show which is similar to American Idol, where I think something like 110 million Chinese used their cell phones to vote for the first time. That has-- that's very interesting from an advertising and marketing point of view.

It's extraordinarily interesting, but it's also probably interesting from a political point of view as you move forward. So there are different strategies being deployed differently.

If you look at the use of ITV, you have to really go to Scandinavia. You look at, you know, some of the Internet voice applications that are being created in places like Astonia.

The world is really a terribly interesting place and these technologies are being deployed differently in different markets, and in some cases, the U.S. is slower than many parts of the rest of the world, but that's where you'll see us making investments. Those are the things we're interested in, because those are the things we believe our clients are going to be most interested in over the next three to five years.

We've also seen a little bit of shift in our reporting of numbers. As John mentioned, we are consolidating a lot of it, the Internet media buying and planning, which was probably coming out of our stand-alone Internet agencies and now getting reported, are picked up through an OMG. So it would show up as traditional media advertising.

We also have a lot of our Internet activities are really spread around all of our agencies, where we have strong in-house units in each of those. The reporting of those revenues, if it's Internet-based, but it's advertising oriented, it would probably show up as advertising versus CRM, whereas before when those revenues were more stand-alone, they would have been more in the CRM category.

Our media business is also doing quite well. OMG, which is a combination of OMD and PHD were making some very significant strides and there have also been several acquisitions in that space over the last couple of years that are really taking off.

And then maybe a quick follow-up.

Are you, is it fair to say right now you're suffering a double hit on your P&L from stock compensation expense due to options issued and your shift to cash comp, which would be recognized in the current period or am I thinking about that the wrong way? If that is true, any idea how meaningful this would be and how long it persists?

Well, we were early in expensing options, so compared, when you try to do comparisons to others in our category, I think that's something of an anomaly. But--

But I don't think there's a double hit on a year-over-year basis. I think we're shifting the compensation expense from options to more cash-based, which has an impact on the cash flow statements. I don't think it has a year-over-year impact on the P&L itself.

I think we have time for one more call. We're getting pretty close to market opening.

Very good. And that last question then will come from the line of William Bird with Citigroup. Please go ahead.

Yes, I was just wondering if you could clarify on international? Do you think the pickup is sustainable? Thanks.

We need an economist.

Right.

If there are no more Danish cartoons, you know, Asia or South America, I think, yes. Western Europe, I-- prior to 5:30 this morning, I would have said yes for certain, and then I saw something coming across the ticker tape saying first quarter growth in France is, you know, six-tenths of a percent.

We're really going to be impacted in western Europe on their GDP growth and the quality of our assets. But last year in Europe, western Europe, the non-euro countries, we spent a lot of time repitching and maintaining our client base as opposed to what we've done in the United States, where we weren't faced with many of those challenges, where we were going out and getting new business.

I'm on my way this evening to Europe to, on, you know, on a new business, a very significant new business related activity so we see growth. But we don't have a crystal ball.

And we're certainly hopeful that the pickup in the fourth quarter in Europe continues. There are some pretty good tailwinds. I mean I think the World Cup is coming up this year, so that should be a positive of the Olympics, I guess, in Italy.

You know, we don't really think the Olympics make a significant difference in our, say, our global revenues. It may, you know, change Europe a little bit. So I guess we're optimistic at this point, but not trying to be the economist.

Thanks.

Thank you, all, very much. We're getting pretty close to 9:30, so we're going to call it off. Thank you for taking the time to listen to our call.

Great. Thank you very much. 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.