宏盟集團 (OMC) 2007 Q4 法說會逐字稿

Good morning and welcome to the Omnicom fourth quarter and year-end 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

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

Thank you and thank you all for taking the time to listen to our fourth quarter 2007 earnings call. We hope everyone's had a chance to review our earnings release. We posted it to our website, both the press release and the presentation covering the information we'll present this morning. This call is also being simulcast and will be archived on our website

Before we start I've been asked to remind everyone to read the forward-looking statements and other information that's included on page one of our investor presentations and point out that certain statements made today may constitute forward-looking statements and that these statements are present expectations and actual events or results may differ materially.

We're going to begin the call with brief remarks from John Wren. Following John's remarks, we'll review the financial performance for the quarter and then both John and I will be happy to take questions.

Good morning, and thank you for joining our call this morning. 2007 was an excellent year for the group and as Randy just mentioned, he'll take you through the details in a couple minutes.

There are a couple areas I'd like to highlight. Revenue growth in the fourth quarter was very strong in the U.S. and this was also supported by very strong growth in most European countries as well as Asia and South America. Growth in the U.K. and France did slow during the quarter, but I don't believe it's a trend, I just believe it slowed in the quarter. Over the course of the past 12 months, our revenue growth was very strong in all of our markets and disciplines. While you may see some peaks and valleys in specific numbers in individual quarters, over time I think you'd agree our performance is very consistent.

We're also very pleased with our businesses and believe that we're well positioned going into 2008. Our agencies continue to be unsurpassed in their creative recognition and we have a wonderful list of clients who, like everyone else, is a little bit nervous about the economy, but we haven't seen any major or serious cut backs in spending as of today.

A key component of our success also lies in our ability to invest in our business and during this past year, we invested at record levels and we plan to continue to do the same thing in 2008. We're also seeing a rise in acquisition activity and as you know, we're very, very disciplined about that, especially the return that we get on investments that we make and also our ability to integrate them, but activity has picked up and pricing, I believe, is coming in line more with historic expectations.

Switching to net new business, which Randy will cover in a lot more detail, our net wins for the quarter were just under $400 million. That brings our net new business for the year to $4.6 billion, which is an increase of about $400 million over 2006. The two accounts which dragged our growth down, a little bit, for this one quarter was the portion of the Dell account which we lost, we lost only a portion of that and the AT&T media accounts, but I'm happy to say that AT&T continues to grow with us as a significant client.

At this point, I'll turn the call back over to Randy and then he'll take you through the numbers and we'll be happy to answer your questions.

Thank you.

As John noted, we're very pleased with the strong performance of our agencies in 2007. While it's still early, we appear to be off to a very solid start for 2008.

Revenue growth in the quarter increased $409.8 million to $3.6 billion; that was an increase of 12.7%. As a result, revenue for the year increased $1.3 billion or 11.6% to almost $12.7 billion. Operating profit for the quarter increased 12.2% to $531.9 million, that's an operating margin about 14.7%, which was in line with the fourth quarter of last year. For the year, operating profit increased 11.8%, to just over $1.6 billion and the operating margin was 13.1%, and that was up marginally over last year.

During 2007 we continued to increase our investment in our people, in training, in technology, and in numerous new business development initiatives which together have resulted in our industry-leading organic growth and leaves the company very well positioned for the long-term. On a new business front, as John pointed out, our net new wins in the quarter totaled $381 million bringing our full year total up to $4.6 billion, which was about a 10% increase over last year.

As I frequently point out every quarter, new business seems to have two groupings. Larger accounts, of which there are generally only a handful each quarter and are generally U.S. and advertising centric. And then there's what I lovingly describe as the engine room, which given the international and nature of our business, there are a very large number of smaller accounts that are awarded each quarter.

This quarter we were on the losing end of the Dell consolidation, where DVD and OMD were two of the more than 50 agencies worldwide serving Dell. GSD&M lost a portion of the AT&T media business in that account consolidation. While GSD&M didn't win the media consolidation assignment, but we do continue to expand our overall relationship in all the disciplines with AT&T.

In the engine room, we had an excellent quarter, with more than $1 billion of net new business wins and aggregate, excluding Dell and AT&T, net new wins would have approached $1.5 billion. While we certainly would preferred to be on the winning side of these two accounts, overall we're very pleased with strong new business performance of our agencies and market leading organic growth performance.

Net interest expense for the quarter was $14.3 billion which was down about $9.8 billion from the fourth quarter of last year. And down, by $17.6 million to $74 million for the full year. The year-over-year improvement is primarily the result of not needing to make supplemental interest payments during the year on 2031 and 2032 bonds offset by having four quarters this year versus three quarters of interest on our fixed rate note that we issued in the beginning of the second quarter of 2006, also, higher overall interest rates on short-term borrowings and increased daily average borrowings resulting from our share repurchase activity during the year.

A quick note or update on 2031 bonds. Many of you have probably seen last week we offered bond holders a supplemental interest payment of $9 per bond on those bonds. As a result, none of the bonds were put back to the company. By itself, this increased our interest expense in 2008 by about $7 million.

On the tax front, our reported tax rate for both the quarter and the year was about 33.9%, that was up a bit from last year. As you may recall, last year's rate was favorably impacted by a couple of small one-time items. Absent those items, the underlying operating tax rates are fairly consistent year-to-year.

Net income for the quarter increased 13.2% to $113.9 million, bringing the full year total up to $975.7 million. That was an increase of 12.9%.

And then fully diluted earnings per share reflecting our performance for the quarter, as well as the impact of share repurchase activity increased 18.5% to $0.96 per share and our year-to-date diluted EPS increased 18% to $2.95 per share.

Analyzing our revenue performance, first FX in the quarter was positive, 5%. or about $161.7 million. Looking ahead, if rates stay where they are, CapEx should continue to be positive in the 3 to 4% range in the first quarter and step down about 100 basis points in Q2, an additional hundred basis points in Q3 and would be flat in Q4.

Growth from acquisitions, net of divestitures, added about $36 million to revenue in the quarter or about 1.1% or about $78 million for the full year and about 0.7% During the quarter we closed two new acquisitions and started off 2008 with a couple new investments. As John pointed out, acquisition activity or acquisition opportunities seem to be improving, and our pricing seems to be coming back in line.

On the organic front, revenue growth continued to be very strong, coming in at 6.6% for the quarter, adding $211.9 million to our revenue. For the year, organic growth was 7.1% adding $802.6 million.

As for a mix of business, traditional media advertising accounted for 43.5% of our revenue and marketing services 56.5%. As for their respective total growth rates, advertising grew 13.1% in the quarter and marketing services 12.5%. Breaking down marketing services revenue in the quarter, CRM continued to be very strong, growing at 13.3%. Public relations, which was a bit slow in the beginning of the year, came on very strong in the second half. It was up 9.6% for the quarter, and then specialty communications increased 12.2% driven by excellent performance in our Health Care agencies and an acquisition in Q3.

On a geographic front, our mix of business in the quarter was 51% U.S., 49% international. In the U.S., revenue increased $160.8 million or about 9.5%. Acquisitions added $18 million or about 1.1% and organic growth was very strong at 8.5% adding $142.8 million.

Internationally, revenue increased $249 million or 16.3%, $161.7 million of that was FX which was about a 10.6% growth. Acquisitions added $18.2 million and organic growth was 4.5% adding $161.7 million.

Obviously we had excellent performance in the United States this quarter and for the year. Internationally this quarter we had strong performances in the emerging markets of Asia, the Middle East, Latin America, and Eastern Europe, as well as an established markets of Asia, Australia, New Zealand, Hong Kong and Korea. We also had excellent performance in the other North American markets of Canada and Mexico and we had mixed results in Europe as John mentioned, which appear to be potential timing issues between Q3 and Q4. Overall, we believe it was an excellent quarter and our agencies in general appear to be off to a very good start for 2008.

On the cash flow front, the year was very strong and our performance was consistent with historical trends. Our cash management programs continued to perform very well. As most of you know, our primary source of cash was net income, adjusted for basic non-cash charges which for us were primarily stock-based compensation charges and the related tax benefits, then depreciation and amortization. These items totaled $1.27 billion in the quarter. Our primary uses of cash, I'm sorry, $1.27 billion for the year.

Our primary uses of cash are dividends. They totaled $182.8 million, capital expenditures, totaled $223 million, acquisitions including earnout payments on prior acquisitions totaled approximately $358.8 million and share repurchases for the year totaled almost $900 million, but we also received just over $100 million of proceeds from option exercises and stock sold under employee stock purchase plan, that resulted in net repurchases of about $798.8 million.

As a result of our repurchase activity, our average diluted share count for the quarter was reduced to 327 million shares and we finished the quarter with diluted shares outstanding of approximately $326 million. With the heavy share repurchase activity this year due to the continued improvement in our cash management programs, we finished the year with net debt out understanding of $1.2 billion. That was up only $91 million year-over-year and our operating leverage, as measured by net debt to EBIT and EBIT to net interest, continued to improve.

And on that note, I'm going to turn it back to the operator, and John and I would be happy to take your questions. Thank you.

Ladies and gentlemen, if you wish to ask a question [OPERATOR INSTRUCTIONS]. Our first question this morning comes from the line of Alexia Quadrani of Bear Stearns, please go ahead.

Thank you. John, could you give us a bit more color on what your clients are saying about the outlook, how they're spending in general? You've been in this business for a long time, does this feel more like a moderate growth year or more like a 91 or 2001?

Sitting here today, Alexia, all of our clients, not all, but most of our clients are under some pressure for commodity prices and the rest for their own businesses. They're concerned with the effectiveness of the marketing efforts. That has been a theme for a long time, it gets punctuated a bit when, when you have unsettling economic times.

What's good for the industry this year, you do have the Olympics, you do have the European soccer, you have the elections, all those will help in 2008 in a macro sense in terms of advertising and media, I believe. We're not seeing cut backs, we're not seeing, I think there's a cautious tone out there, but that's about all that is at the moment. We remain cautiously optimistic. We're very careful as you know and we have been through slowdowns or moderations of growth before and I think the company's performed very well. So we're optimistic and there's a lot of good things happening, but remembers also, as I said, we've been to this movie and we'll weather it very well, I think.

And I guess, given the cautious tone or the degree of caution, how has that changed, I guess, the way you manage your investments or expenditures if at all?

That's not, there's really been no change, we haven't had to make a change. We haven't seen any reductions in budgets or, so we haven't really had to take any action across most of our businesses. We're just a bit cautious about, about the environment and we watch it, we've always watched it very closely. We'll watch it closely to see which industries are hurting what can be done and how do you invest in personnel and how do you invest in longer term commitments. But you know, the auto industry is suffering this year for instance. So there are pockets of strength and also pockets of concern. But there's, overall, our budgets internally generated from our people are far more enthusiastic than I am and that's a good thing. Most of that enthusiasm is based upon their knowledge of what they're doing with their local clients.

Thanks, and just one more question. On the follow-up on the net new business, any sense how January started off for the year?

I think January was a net $500 million.

Little more than that.

Little more?

Yeah, so very strong.

So it was very strong. I mean, the fourth quarter if anything was an aberration.

Thank you very much.

Thanks, our next question comes from Michael Nathanson with Stanford Bernstein.

Thanks. I have one for John, one for Randy. I wondered, John, if you could follow-up on the comments that you think France and U.K. was a quarterly thing, maybe a pull forward versus any future signs of weakness. How do you feel about that? And how do you know that. Randy, wonder if you could comment about buy backs versus your (inaudible), you spent over $2 billion on buy backs, but $400 million over the past two years on dividends. Why not adjust this ratio and increase the payout and maybe attract new investors into the market looking for higher dividend companies?

First, in terms of the U.K. and France, U.K., we have to watch that very closely, like the U.S., it's probably, U.K., Ireland, England, are suffering from mortgage crisis and the slow down in their economy. So we're watching that very closely and will continue to do so.

January's results for that month which are not really indicative of anything showed a recovery in terms of our growth for January in the UK. And France hasn't really suffered; I think it has to do with impact of businesses that we divested more than anything else and that impact into our calculations. I haven't seen any real slow down in France per se.

You have to be very careful looking at quarters and thinking of them as trends. Last quarter U.S. growth was less than international, I think, at least I heard from a number of people that they were, you know, surprised about that. You know, this quarter, U.S. you know, accelerated and international slowed down, which is probably, certainly an opposite trend of last quarter, and again, probably different than what I would have necessarily expected in general.

So it always makes me go back to realize that excellent execution by the companies and timing of client spend really overwhelms the economy in general and you have to look at these things on a much longer term basis than quarterly to think of trends, especially on a country by country basis.

Going back to your other question, you know, last year, I think it was the second quarter we increased dividend about 20%, you know, I think, well it's a board decision, I would suspect that we'll continue to increase our dividend, you know, probably faster than our net income growth. I, I don't know, but I don't see us, I certainly wouldn't recommend you know, a dramatic increase in the dividend, we would prefer to be spending our money on excellent acquisitions because when we make acquisitions on the basis that we make them, they're very accretive for shareholders, generate a great return on capital. We'd like to have the ability to do that. We can obviously adjust share repurchase activity based upon sort of the immediate ability to make acquisitions, whereas if we dramatically step up dividends, that's not something we think that we can adjust, certainly not downward on a moment's notice if the acquisition pipeline really builds up. So I think we're a much more consistently focused operating plan and you know, again, one or two years isn't a long-term trend.

Thanks.

Thank you our next question then comes from the line of Troy Mastin with William Blair.

Good morning, thank you.

I'm curious if you have give perspective on the nature of business wins in the quarter and maybe any trends there, specifically, maybe the mix between domestic international, marketing services versus advertising and then the engine room where you're seeing a lot of strength in new business. How does this compare to the typical margin structure versus other high-profile wins?

I don't have the answer to the first question. That's not, you know, frankly analysis that we do, you know, certainly in, in, in meetings with investors I've said it pretty consistent. We collect this net new business wins data predominantly because shareholders, or analysts seem really focused on it. We don't really think the numbers are, are great numbers for people to focus on, but you know, since there's demand for the data, we try to supply it. We don't go through and cut it up into all those segments that you asked for.

One thing that we do do, because it's, you know, it's glaringly obvious, each quarter the net new business report is generally 70 to 90 pages long. If you think about our business a little bit, we have about 2500 agencies and about 120 countries. We're in a huge number of disciplines that we grouped together in these four categories. Once you get outside the United States and maybe a couple other major markets in the world, multinational pitches, you know most of the net new business activity is relatively small. You get a, you know, few pitches each quarter that are big, which are consolidations, most of those that have big numbers attached to them are advertising-centric, they're U.S.- centric and lately, with the consolidation in media, which is a lot of, you know, sort of, moving deck chairs around a little bit, you get some perceived very large numbers that, from a revenue basis, you know, are not near as impactful as some of these numbers sound .

From an operating standpoint, the one or two large win or losses, while it's never good to lose an account and we focus on that tremendously and it's always great to win those accounts, from an overall management perspective, the difficult challenge is if that engine room isn't working every day, that's hard to fix. It's hard to, you know, get on a plane if you had 500 agencies that weren't in the positive category, that's hard to turn around, you know, fast. That engine room for us is extremely consistent as it should be and, you know, very focused on its net new business performance you know around the world and that's been strong. That's one of the reasons we broke it out. That's one of the major strengths of Omnicom is the breadth and depth of those agencies globally and the success and the consistency that they

Regarding margins from the engine room, do you have a sense if they're meaningfully different?

I don't believe they are.

When you look at our numbers, you won't see any difference. I think there's no consistency in the way the numbers get reported across the industry. If it was a gross media win, we, when we report our numbers, we reduce our wins by 25% of what the billing is to be more reflective of a correlation between the revenue you might expect from the reported billings. I think we're the only ones in the industry that do that.

Actually we do a couple things on that front and it's probably worth noting. And I don't follow how the other people report net new business wins. I know that we're, we're somewhat different, you know, first big difference, we all have different mixes of business, so therefore on a quarterly basis, you know the mix is obviously going to vary quite a bit. We report media only wins, we take those media only wins and losses and we divide by 4. So we take 25% of the number and that's because the commission, or revenue structure on media only wins is much lower and therefore, you know, we try to get it to normalize with, I'll say a general advertising account or historic advertising account.

In the other areas, we report what our revenues or our billings are for those accounts. So, in something like PR, you know, it might be a $1 million account, we report it as $1 million. I believe some of the other networks make adjustments to that, divide through by 6.67 in order to try to do the same thing we do with media which is get it to approximate the old commission structure in advertising. I don't know for sure everyone does that, but I think that's more the norm. So we try to be conservative on both sides. As a result of that, I believe our subsequent revenue generation off of our reported net new business number is generally a bit different. Yeah, I think when you look at our net new business wins and compare it to our net new business wins, I think the numbers are very comparable.

I would think the same thing for the other networks. I'm not sure with the way we report and mix of business that they're really comparable numbers from one holding company to another holding company. You know, again, we don't believe those numbers are great numbers for investors to look at, especially on a quarterly basis, long-term trends are much more important.

And probably the most important element of this is we have, you know, 2,000 agencies out they're all hunting every day.

Yes, that's my point with the engine room. That operating philosophy that, that they're out hunting for themselves as well as looking for the network business, that combination creates a lot of consistency and frankly a culture inside the Omnicom networks and agencies.

Great, and one more, moving onto the M&A environment and the situation in the credit markets and maybe slow down in macroeconomic environment.

How has this affected your M&A strategy -- have you seen targets starting to come in under expectations and price? And if there's anything specific by geography that's worth noting, we would appreciate that as well. Thanks.

Well, the type of acquisitions that we're looking at are, tend to be very, very specific. They are very consistent with the expansion of the business plans of our major strategic platforms within the company and they're well within the cash flow capabilities of the company to finance them. While what we are seeing is, there aren't as many people willing to pay foolish prices for things, competing for deals, and so, the pipeline is pretty robust where people who believe by joining an Omnicom, they can grow those individual segments or their individual business faster.

That's returning to the marketplace. It was absent for a while when you'd get our ideas about pricing and walk down the street and some private equity guy would just blow the number up. Those guys are gone. So if there's, you know, any silver lining to some of the slow down out there, it's eliminated a lot of these silly, non-strategic buyers and we're looking very hard at a number of things.

We'll see how that plays out. Yeah. Long-term. A year ago, it was in many cases, hard to get to almost the second round because, you know, sellers had you know, what we believed were unrealistic expectations, but frankly they were getting them. And I guess on many of those deals, I couldn't really blame them based upon the numbers they could get people to pay. It appears that that money has dried up. We'll see if it stays that way.

Okay, thank you.

Thanks. Our next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Just one quick question.

You guys have covered a lot already, did you guys see any impact from the strike? It does sound like this is going to get resolved soon, but was there any business impact and just, John, did you see any takeaways from this as people reassess strategy not knowing how long this is going to go on and if you think there are longer term impacts to take from this, thanks.

In terms of our business, we haven't been able to pinpoint any specific reaction to, to the strike. We'll see what happens and how fast they crank up and put new product on, on the air. But clients are, clients find consumers, and we're not married to any particular media, so, we'll find the consumers for the clients and so the TV is only one avenue for us to accomplish that.

Obviously everybody's relieved the strike is over. The long-term impacts, I don't know, you hear a lot of rhetoric about increasing reality TV and all the rest of it and then, if you follow closely you see the death of reality TV too. There's not too much you can do to shock the American public. So I don't have any real long-term view as to what the implications of this were.

There were a couple interesting things. You saw things like the Super Bowl which obviously had great ratings, but it was also, I think it was the largest single day, single event, you know, media buy in history which OMD did, our agencies obviously in those kinds of events in this market were probably the importance was more exacerbated further.

From an Omnicom perspective, frankly if clients were moving some of the marketing dollars away from TV and into other marketing initiatives, that's generally a positive for us. We have much greater market share outside of traditional media advertising than we do in traditional media advertising. That's not really a bad thing if it occurred. If it occurred, there's always the question if it worked, do clients move back once what pushed them out changed or if it worked do they stay where they're at? It may have accelerated a little further, some of these shifts. That'll all obviously play out over time.

Let me get one follow up in there.

On the buy backs to the extent that the performance of the stock more recently put you in need of things, sweetener, who knows what's going to happen with the stock market in the next 6 to 9 months, does it make you take a more conservative outlook towards buy backs or is that totally irrelevant as a separate analysis?

First of all, Randy used the term $9 per bond. 9/10, for people not familiar with bonds. 9/10 of 1% we paid to keep the money outstanding. It's a pretty good deal, any day that you could get it.

In terms of our own ability, we live within our cash flow, at least we have been certainly for the last five or six years. And we're able, depending on the acquisition requirements, investments we want to make, we're able to utilize or not utilize our excess cash flow after looking at that activity for share buy backs. So it's a very fluid type of an analysis and it has to do with whether or not we're making other types of investments with that cash.

Okay, thank you.

Thanks, our next question comes from the line of Craig Huber with Lehman Brothers. Please go ahead.

Good morning, thank you.

Given a slower economic environment, can you help describe for us what is it about your business model historically, your company's been able to grow organically the top line through the last two recessions? I believe your worst year was 2002, your top line grew 2.8% organically, EPS grew 10%. What is your business model if you can do that through tough times? And also can you describe, if you would, your flexibility on the cost front.

Thanks.

Sure.

Deal with the bottom line first. Um, there's a higher proportion of compensation which gets paid through incentive income and in order to receive that incentive income, various, the employees, the agencies, the groups have to hit targets and objectives. So when the business slows down, their expectations for what they earn and receive, based upon their top line growth also self corrects. So that allows us to have flexibility in terms of what the, what the net income and what the performance of the company is, even in the toughest of times.

In terms of revenue growth, we're a global business. 51, everybody's talking about the down turn, but the down turn is, at that time the U.S. where there's a housing market crisis. Right now that is the U.S., the U.K., maybe Ireland. The rest of the world, brick countries, Asia, South America are all doing very well in terms of growth. So it's the balance of our portfolio, it's the attitude of those 2,000 agencies wanting to go out and get new business every single day. We have a client base over 5,000 clients. So, and the largest client we have is only 2.8% of our revenue. So, there's a lot of conservatism in terms of product mix, geographic spread and when one market isn't growing, another one generally is. So it allows us to continue to grow. Plus we stay very focused on our costs, and make certain that we don't hesitate to act if there's a decline in a particular market or for a particular account.

And you can't overestimate the power of that culture. The depth of the, and the quality of the financial and operating staff down to our agencies, you know, I find incredible, and their consistency. Their focus on growing the business and not sitting back, you know, trying to look at the overall global economy as some macro excuse. Obviously, they have a concern about it, but they dedicated their people to growing their business, new wins, new clients overwhelm an economy. It may make it harder to get, but it means they've got to go out, work harder and generate revenues to keep their people happy and keep their business growing. We really have to give a lot of credit to that depth and breadth.

And also, two other nitpick questions.

In the past you were able to give color on small businesses in the U.S., one a help wanted recruiting business and the other a yellow page agencies business, just curious what the percent change in the revenue for the businesses were?

I don't know about the percent change. They were negative organic growth in the quarter. Yeah so, there wasn't a major turn on around in either of those businesses.

I've got to say the, you know the recruitment business is a very good business. Domestically I think it's the leader in the space. It's you know, both a thought leader and a market leader. You know, the Yellow Pages business, I don't think I could necessarily give those same accolades to it.

But, these are, we have somebody looking, we'll see if in a second we can get you the answer.

These are very small businesses and I think when we refer to them in the past, we were talking about impact they had on our specialty advertising category which is also relatively small. So, so it, they're not, they're not big numbers.

They're certainly not big numbers from an income standpoint.

Right, exactly.

You know, they're, they're both relatively low margin businesses, you know, as I pointed out before, you know the recruitment business is probably, you know, our most economically sensitive business.

Yes.

It has fairly substantial market share domestically.

And so, obviously tied, you know, one to the economy, obviously there's also significant shifts in that space overall which I think they've been a thought leader on in trying to change and moving on online recruitment, you know, there's various technology initiatives going on that are automating or streamlining any large companies recruiting processes, you know, businesses like Career Builder and Monster, et cetera change the business.

The Yellow Pages business is a whole industry that, you know that's been changing quite dramatically and going from a paper business to really what I think people describe as a local search business, which is sort of a combination electronic tied with search marketing, online Yellow Pages, you know, mobile search, mobile marketing, as well as print. While I don't see the print business going away soon, you certainly see necessary for integrated, you know, capabilities and you know, this business is probably not as far along, and certainly not the thought leader that our recruitment marketing business has been. So we'll see how that one, how that one plays out.

Lastly, if I could, just concerning CapEx. I know it's up about 25% for this last year, what should investors model for this coming year? Higher or a lower number, or in between?

Probably a little bit lower than this. What you've, there's probably two drivers to that. The increase over our depreciation and amortization number, there's a couple of drivers to it. The first big driver is the number of office relocations, because, whenever we have an office relocation or the release of, I'll say a significant office space, there's a, generally a relatively, you know, sizeable CapEx number associated with, you know, renovating or building out the office space and upgrades in technology platforms. So this year we had two or three substantial office relocations, you know, large, 200,00 to 400,000 square foot facilities that got redone. Those tend to spike the numbers around a little bit.

We also, as I mentioned before, we've historically done the vast majority of our, I'll say, technology, you know, PC servers et cetera on an operating lease basis and we've changing some of that velocity to move it from operating leases to capital leases which really has no impact on our net income. You know, we want to get the most favorable financing you know, best return on investment for our shareholders. And we think, this is, you know, and again, that movement's maybe $10 million or $15 million over the course of the year. So you know, it's not substantial, but you know, there's some shift.

You would use a number a little lower than 07, is that what you're saying?

I think it will be lower than 07 because of the office shifts that I know of right now. You know, I don't know, I can't say top of mind I know every office relocation. We have about 1100 leases around the world. You know, I, I know we have people that focus on them. I can't say that I know every single one that's coming up this year, top of mind.

Shame on you, thank you.

Thanks and we have a question from the line of Karl Choi with Merrill Lynch. Please go ahead.

Hi good morning. Couple of questions here.

One is regarding your comments about acquisition evaluations becoming more reasonable, just wonder if that extends to digital acquisitions as well and second question is, just wondering, if we do hit a more severe slow down, how well do you think PR will hold up this time? It didn't really hold up well in the last down turn. Just wondering what your thoughts are. Thanks.

Digital acquisitions become more reasonable as well. In terms of PR, that business model has changed quite a bit since the last recession. There's an awful lot more online activity. There's a lot of interactive, in terms of what the component parts of that business are.

So sitting here today with the client base that our PR companies have, we don't see any reduction or cutbacks that our companies are forecasting. Obviously we watch our forecasts on a monthly, regular basis and when there's a change we take action. So I don't have anything.

Also have to look a little bit at the recession. At the last recession was following 9/11. There was not a lot of interest on companies' parts to really be focusing on, you know, PR. in that sort of environment. People weren't getting past the front section of the newspaper for a number of months to be worried about new product introductions and other things. Also at that time, the businesses in that new product category, you know were, there was a big hunk that was tech-focused.

While there was an overall recession, you know, maybe starting out off of 9/11 and some of that, there was, you know a big reduction in the tech sector. So each time, you know, it's a little bit different and as John pointed out, our PR business is, you know, I think were very broad-based, obviously extending their disciplines into a lot of the new technology which certainly made their business very exciting.

Great, last question.

On free cash flow usage, it sounds like you're signalling that you spend more on acquisitions to the extent that valuations work out. Should there be a certain amount of share buy back that we should expect?

I think we'll still have strong share buy backs. We don't really put a number on it. You know, we've had pretty good share buy backs already year-to-date. You know, where the stock price has certainly been at, you know, while we don't normally spend a lot of time focused on, you know just doing it because of the share price, you know, at these share price levels or multiple levels.

We believe it's a good investment.

Yeah, it's hard to sit back and ignore it.

That's good to know, thank you

Thanks we have a question from the line of Catriona Fallon with Citigroup.

Good morning, gentlemen.

Could you ever discuss, Randy, the extent of any headcount reductions due to the changes in the Dell and AT&T accounts?

They were all taken care of in the, in the fourth quarter.

Okay.

I don't know what the numbers were.

I don't, I don't even know what the numbers were either, to be perfectly honest with you. Dell was not that significant because, as many of you might remember, we had reported in earlier quarters that BBDO lost part of the Dell account. So we had major adjustments throughout the year on that and in terms of AT&T, there was a, the business that we lost there was the the wire line media business. The wireless business, which was the largest part of that media account was a BBDO-- I mean a (inaudible) account going into the pitch so they retained that part and they took away our wire line piece which was a declining business to begin with in GSD&M in Austin, Texas made reductions that it felt it needed, and it since came back and won other business and replaced some of that revenue with other clients and they're the only game in Austin. So, so, they retained as many of the people that they possible could.

Okay.

Some of the market, these were account consolidations of which we had pieces. So certainly the market news about the win, while we would have loved to have the win because it would have been expanding our business, the piece we lost was, was far smaller than the totals that were reported.

As John pointed out with BBDO in the second quarter, BBDO elected to take on business I believe it was Best Buy and that was deemed to be a conflict.

At the time.

At the time so they walked away from the Dell business in taking that business. That was reported earlier in the year.

Okay, all right and can you discuss a little bit, the seasonality of revenue, specifically with the Olympics. Q3 has typically been kind of the second lightest quarter. I'm wondering, with the Olympics this year, does that make Q3, perhaps not as seasonally light and just a follow-up on that, what's the opportunity you're seeing in Asia-Pacific, kind of post the Olympics? Is this accelerating opportunities there? And then just a follow, I guess last question would be, are you seeing impact or change to the business due to the HD conversion that's going to be happening in 09? Are advertisers looking for anything different in the way they're advertising due to the HD conversion?

We'll deal with the last one first. No. Change is constant.

Okay.

So there's no specific effort associated with every, every American has to have an HDTV in 2009. That isn't something everybody's highlighted.

That may increase people's focus on, you know, maybe production qualities or something. I don't know.

But the uh--

The Olympics question.

Yes, there's a lot of build opportunity in the Olympics. What a lot of TV production, a lot of activity occurs prior to the actual games themselves. What happens in the games is you get a lot of events and promotions that go on in that quarter. These numbers are helpful, but they're helpful on the margin. All right?

We're large diverse companies. As I just tried to indicate before, our business is spread over 2,000 agencies around the world and our largest single client accounts for 2.8% of our revenue. So no one event is going to move the needle that much. I think what the Olympics, what the elections, what soccer in Europe helped is any mitigation you had because of any decline in the U.S., it will help decrease the headwinds, but I don't think we're projecting you know, big spikes in the third quarter, at this point.

Yes, there's a couple things with some of these movements. There aren't too many companies I've heard that have come out and said "it's an Olympic year and our net income is going to be way down because we are going to spend a lot more money in marketing." So again, there's some movement around.

The Q3 question you asked. Generally smaller quarters are Q1 and Q3. If you think through the year a little bit, we're largely a services organization. While we have a lot of different revenue models, a lot of it boils down, these days to, you know, labor hours that you're consuming. So when you look through the quarters, thinking, you know, as a starting point they should all be flat, you have kind of a January effect in Q1, which brings those numbers, you know, probably down a little bit from the norm and in Q3 you have an August effect, especially in Europe and starting to become more and more in the United States. There's a lot of vacation time in that month, which bring those numbers down a little bit.

So on a natural bias, those two quarters are generally a little bit lower with Q3 and Q4 being higher. The way contracts are being done, there is some smoothing versus our historic revenue patterns, so over the last few years, we've been seeing a bit higher organic growth in Qs 1 and 3, versus 2 and 4, you know, windows, trends smooth out, you know, not sure. But you know, I think there's a little bit of a natural bias that Q1 and Q3 should be a little less than Q2 and Q4 on the long-term basis.

Great, thank you.

Thank you, I think we're about out of time. So with that question, I think we're going to thank everyone, you know, for their time. And we'll, we'll talk to everyone over the course of the quarter. Thank you very much

Thank you. 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.