宏盟集團 (OMC) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Omnicom third quarter 2008 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 would now like to introduce you to today's conference call host, Executive Vice President and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Thank you, and good morning. Thank you everyone, for taking the time to listen to our third quarter 2008 earnings call. We hope everyone has had a chance to review the earnings release. We have posted to our website both the press release and a presentation covering the information that will that we will present this morning. As the commentator mentioned, this call is also being simulcast and will be archived on our website.

Before we start, I have been asked to remind everyone to read the forward-looking statements and other information that is included on page 1 of our Investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements, and that these statements are our present expectations, and actual events or results may differ materially.

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 for the quarter in a little more detail, and then John and I will be happy to take questions at the end.

Good morning and thank you all for joining our call. We were pleased with our third quarter performance, and we characterized the results as being in-line with our expectations. As Randy just mentioned, he will take you through the details of the quarter in just a couple of minutes, but I would like to share with you what we see today. No one could have anticipated the current credit crisis, or the unprecedented volatility that is created in the financial markets.

We are in the process of trying to assess the impact these events will have on advertising spending for the first half of 2009. At this point, our clients generally remain very cautious. The only two sectors which have cut back in fourth quarter spending are automotive and some of our retail clients.

We expect the fourth quarter to be a challenge, as many normal year-end marketing projects may not be authorized, if financial markets continue to be volatile.

As many of you know as in past recessions offsetting part of the uncertainty in revenue is the flexibility we have in our cost structure. In the short run, incentives earned are based on achieving our objectives for the full year. Longer term, as we have always done, we will adjust our cost structures to reflect our best estimates of revenues going forward.

The one thing I can promise you is the Company continues to be focused on the fundamentals, which have always seen us through good times and challenging times alike. These fundamentals are our leading portfolio of global advertising and marketing brands which are the best in the world, a well balanced mix of business diversified by discipline and across geographies, and a broad base of clients and industries served. Unparalleled creativity which is the core of delivering value to our clients. And cash and cost disciplines, that allow us and have allowed us to invest in growth and productivity.

Finally, as we sit around and we look past the current crisis, I am hopeful that acquisition pricing will finally come back in-line with our historic expectations. As many of you know, we have been very disciplined, as we have always looked for appropriateness and strategy, fit, and especially in the past several years, sensible pricing.

One benefit of the current crisis should be more realistic pricing expectations from sellers, as there will be fewer strategic and non-strategic bidders for qualified targets. We are hopeful that this crisis will be short-term, but we are planning as you might expect for whatever our clients indicate to us the future will hold.

I will be glad to turn it back to Randy, and we will be happy to answer your questions.

Thanks, John. As we mentioned we are obviously in a very unusual capital markets environment. That environment has created economic softness and widespread caution, at least for the near term. While our businesses have performed well through the third quarter, we have far less visibility going into the fourth quarter and into next year than we have historically had at this point in the year in the past. But our agency management teams are highly focused on managing their staffing levels, and creating as much flexibility as possible in their cost structures to better manage through whatever economic conditions develop.

For the third quarter, revenue increased $215 million to $3.32 billion that was an increase of 6.9%. For the nine months revenue increased $920 million to just under $10 billion and that was an increase of 10%.

Operating profit for the quarter increased 6.6% to $373.4 million. That was an operating margin of about 11.3%, which was roughly flat with last year. Year-to-date operating profit increased 10.1% to $1.2 billion, and that was a margin of 12.4%, and also consistent with last year.

Net interest expense for the quarter was $20.7 million that was up $1.4 million from last year, and up about $2 million from last quarter. Both the increase versus last year and versus last quarter was primarily the result of having to make supplemental interest payments on our 2031 and 2032 convertible notes in 2008, as well as generally higher interest rates on short-term borrowings, partially offset by increased interest income on our foreign cash balances.

On the tax front, our reported tax rate for the quarter was about 33.5%, bringing the full year rate to 33.6%, which is down a little bit from last year. The net income for the quarter increased 5.6% to 213.6 million, bringing net income for the nine months up to 729.3 million. That was an increase of about 10.2%, and fully diluted earnings per share increased 11.3% to $0.69 per share, bringing the nine month total up 15% to $2.30.

Analyzing our revenue performance, although the US dollar strengthened significantly versus most currencies as Q3 progressed, FX in the quarter remained positive at 2.1%, adding $66 million to our revenue, and bringing the year-to-date impact to a positive 4.1%.

Looking ahead, based on current spot FX rates and our current mix of business, we would expect FX in Q4 to be negative almost 4%. Using that same approach for next year, FX would be negative about 5% in Q1, negative about 6% in Q2, negative about 4.5% in Q3, and by definition, flat in Q4. For the full year, that averages out to a negative 3.75% to about 4%.

Growth from acquisitions net of dispositions in the quarter added about $23 million to our revenue, or about 0.7%, and I have to say the pipeline of interest in potential investments, at prices that at least at this point appear to be reasonable, is the strongest we have seen in several years. So maybe there is some good that can result from the financial mess that is out there.

Organic revenue growth in the quarter was solid, especially given the overall economic backdrop at 4.1% bringing the year-to-date total to 5%, adding about $457 million to revenue. And our new business performance was also strong in what was a fairly slow new business quarter with net wins totaling $930 million.

As for our mix of business, traditional media advertising accounted for 41.7% of our revenue and marketing services 58.3%. As for their respective growth rates, advertising was up 6.9% and marketing services 7%.

Within marketing services, CRM continued to be very strong growing 12% in the quarter. Public relations was down 1.2%, experiencing some general softness, and specialty communications was down 3.2%. As you probably know, this category consists primarily of specialty media, recruitment advertising, and our healthcare businesses.

The specialty media category has been impacted by the continuing decline in directory or YellowPages business. We have talked about that for a couple quarters. Recruitment advertising is probably our most economically sensitive business, and it has been feeling the effects of the economy for a couple of quarters now, and the healthcare growth while positive, slowed in the quarter, due to a lower number of new product releases, and cuts in medical education.

Our geographic mix of business in the quarter was 51.8% US and 48.2% international. In the US, revenue increased 63.1 million or 3.8%. Acquisitions were 16.2 million of that, or about 1%, and organic growth was 2.8% adding about 47 million to our revenue. Internationally, revenue increased 152 million, or 10.5%, as I mentioned FX was 66 million of that. Acquisitions added 6.7 million, or about 0.4 of a point, and organic growth was pretty strong at 5.5%, adding 79 million.

Internationally, we had strong performances in the emerging markets of Asia, especially China, as well as in Eastern Europe, the Middle East, and Brazil. Growth in Western Europe was generally slow with the exception of Germany.

Operating cash flow for the nine months was quite strong, and consistent with our historical trends. Our cash management programs continue to perform well, especially given the financial markets. And on the working capital front, we didn't experience any meaningful decline in our overall performance. We have significantly increased our focus in this area, to insure that our performance stays on track going forward.

For the nine months our primary source of cash, again net income adjusted for basic non-cash charges, like our stock based compensation charges and the related tax benefits, and then depreciation and amortization, these items totaled $963 million.

As for uses of cash in the nine months, dividends totaled $145 million, CapEx was $152 million, and acquisitions including earn-out payments on prior acquisitions totaled $388 million. Share repurchases for the year-to-date period totaled $846 million, we also received about $78 million in proceeds from option exercises and stock sold under our employee stock purchase plan, resulting in net repurchases of about $768 million.

I should note we did suspend our stock repurchases back in August, and don't expect to resume until after the capital markets have stabilized. As a result of our repurchase activity over the last 12 months, our average diluted share count was reduced from last year by about 5.3% to right around 311 million shares.

Current credit picture. We finished the quarter in a strong capital markets position, with net debt totaling just under $2.7 billion. As you would naturally expect in the current environment, we have received a number of questions regarding our capital structure and our bank credit agreement. To make sure everyone gets the answers to those questions, we have made a few changes to the presentation.

The first is on the top of this slide. We changed the credit statistics that are shown to correspond with the two covenants that exist in our current bank credit agreement. Those covenants are, first, EBITDA to gross interest of not less than 5 times, and we finished the quarter at 17.4 times, so quite a bit of room. And then total debt to EBITDA of not greater than 3 times, and there we finished the quarter at 1.6 times.

I should also point out that these are the only two covenants in the agreement, and there is not a material adverse change clause.

I am also supposed to point out that EBITDA, or earnings before interest taxes depreciation and amortization, is a non-GAAP measure, and on page 21 of the presentation, we reconcile EBITDA to the GAAP operating income.

Turning to current liquidity. From a liquidity perspective, we finished the quarter in a strong position, with cash and undrawn committed credit facilities totaling almost $2.9 billion, and we had uncommitted facilities available totaling an additional $331 million.

Following this slide, I think it is pages 11 through about 20, we have included some supplemental information summarizing the specific terms of each of our outstanding securities, and our bank credit agreement, as well as a schedule listing the some 32 banks that comprise our current bank group.

I have to say while it is almost impossible to predict the kind of volatility we have seen in the financial markets over the last few months, we do believe that we are fairly well-positioned from a liquidity and capital markets perspective.

And with that, I will ask the operator to open the call for questions.

Great. Thank you. (OPERATOR INSTRUCTIONS). Our first question this morning comes from the line of Craig Huber with Barclays. Please go ahead.

Good morning. A few questions. Can you go through how each of the individual months did from an organic basis from around the world? I particularly wanted to get down to how did the month of September do from organic revenue growth. Clearly it was worse than the overall up 4.1% number?

I just don't have the numbers, Craig. We don't collect it that way.

Okay. Is it your sense that September was down though from a year ago?

No, I don't. I just don't have enough data to tell you one way or the other. Certainly there were changes over the quarter in consumer spending, that our knowledge of that information is really coming from the economic reports that you probably get ten times as many of as we do. As far as our business goes, I didn't see that kind of volatility in it.

Okay. On page 7 you have those two pie charts where you break out your revenues across ten different broad sectors. I was wondering if you could maybe quantify how each of the top 3 did in the quarter versus a year ago, and how the worst three did? To give investors a sense what was really good and what was really poor. In terms of organic revenues by autos, financial participants in the top 3 and the bottom 3 if you would, if you have that?

I will in a minute. Why don't we go on, and I will get you that information.

Lastly if I could ask, cost levers. You do have a lot of flexibility on the cost front, as you alluded to. Could you maybe just quantify round numbers. Incentive compensation pool, what it typically is? How much you could potentially you could save there, with strong headwinds here on a temporary personnel front, how much of your cost base that represents, and also maybe your investment spending, how much you can potentially cut that back if you needed to, in order to help stabilize margins? Thank you.

Incentive compensation normally runs between 20% and 22% of pre-tax preincentive income. It is not all actionable. We can take it down if we must. We would be very specific and very deliberate in going through where it was earned, who earned it, what the help of those particular subsidiaries or sectors were, and we would adjust more to where people hadn't achieved internally set objectives. We do have a lot of flexibility in the near term. We also have it in the long-term in terms of the long goals and objectives that we set.

So needless to say, we will take a look at it. A lot of it adjusts automatically, depending upon what the performance is, because it is embedded into the expectations that the individual subsidiaries have. So we have a good deal of flexibility there. At the core of our business, when you get out a little longer term is talent.

At this point what we have done in anticipation of the slowdown that we see, is we have instructed and our companies are doing this, to cut all discretionary-type of spending where it is possible to delay where it makes sense the hiring for opening positions. And this is not 100% across the board. This is where it is sensible to do this.

To delay the planned first quarter salary increases that we were looking at, until we get a better handle on what the marketplace is, and what clients are going to spend into next year. Those actions have already been put in place.

We will start to specifically look company by company as we get into the fourth quarter, and as we get into finishing the planning cycle, which will go on now for the next six weeks for 2009.

So we are very deliberate in the sensible way that I think we will approach our business, and the way that we will adjust accordingly. Ultimately if we handle it right and there is a sustained recession, it will create opportunity for us, to go out and acquire talent that is available in the industry, that would have under different circumstances may not have moved from where they are currently working. We will make lemonade out of the lemons that we were served, and we will do it in a very deliberate manner, in the way that we have faced other recessions.

Back to your questions for the quarter for the sectors, now I will caveat this a little bit. The presentation that we've put together includes our top 1,000 clients. This analysis I am giving you is for our top 250 clients. I don't think it is going to be any material difference in the numbers.

The auto was weakest. It was down about a half of 1%, and this is total growth, this isn't organic growth. Retail was next at about 2.3% growth, and financial services was about 3.5% growth. Some of the stronger sectors were consumer products, telco and services, and they were all up actually over 20%. I will say telco was only up 15%. Obviously a big range in activity for the quarter.

One last little knit-pick. How many shares did you buy back in the quarter, and at what average price? Can you give us one more flavor for why you [spent] your share buy-back? You know where the stock price is at and given what the outlook is here.

It is really a matter of conservatism. Why we suspended it is because of conservatism with respect to overall capital markets. Obviously there was pretty significant deterioration in capital markets as we went through the quarter. We didn't want to create any additional stress that we needed to on our bank groups, or anybody else out there. While we think the stock is very, probably cheaply priced, there is no sense in trying to create more stress on what is already a pretty stressful situation.

In the near term, cash is king.

Yes. We bought about 10.3 million shares in the quarter, with the bulk of that being in July and the very beginning of August, and the prices were around I think the average price was $42.50.

Great. Thank you.

Thank you.

Thanks. And our next question comes from the line of Alexia Quadrani with JPMorgan.

Thank you. Could you give us a bit more color what you have been hearing from your division heads, or from your larger clients on how spending has changed now in October, beginning in the fourth quarter? Was it a dramatic pullback or was your business just not that volatile? And maybe you can compare it to how you saw it in October 2001?

My division heads are all optimists, which is a great thing. There is caution out there, caution and confusion. The chatter for the last several -- for the last month has been Congress' financial crisis; the world collapsing. There hasn't been a lot of clear actionable information derived from clients above that chatter level at the moment.

As we said, we have seen an express cutback in some of the spending plans for automotive and for our retail sectors. Everybody else remains very cautious but they haven't indicated they are cutting back as of yet. That is a day-to-day assessment at this point given where the markets are.

The more experienced clients are the ones that are not affected by the credit crisis, know full well that these times once they stabilize allow them, if they are strong enough to continue to spend, the great opportunities are often created to increase share. But we haven't got an full assessment yet, because there is way too much noise in the marketplace, Alexia.

A couple things in our business is we have, I will say longer term contracts, they are not necessarily long term. But they are contracts that are not being adjusted sort of day-to-day. We do in the fourth quarter -- it is our largest quarter for project revenue. John mentioned in his comments, an increased lack of visibility with respect to that project spending.

And following up on your comments about the flexibility and cost structure. Do you think it is possible to see flat or even slightly positive margin improvement, if there wasn't any revenue growth in '09?

At this point, we are still assessing the situation, Alexia. We will do as we have done in the past. We will assess the situation. We will set targets to keep our employees actually motivated for the near term and the long term, and get through.

Every recession is different. In many ways we are much better prepared than we were the last time around. But it depends on the depth of it.

And just the last question on your top clients. I think new business has been relatively slow, but how would you describe the current pipeline for new business? And are any of your top, I don't know however you want to quantify -- the top 10 or top 20 clients sort of at risk right now?

There is a limited amount of activity out there at the moment. I mean, our media companies in the U.K won [Boots] yesterday morning I think, so there is some activity still going on, as you might expect. But again, I think everybody is just focused on their own business at the moment. And I don't see a lot of change going on today. And normally the fourth quarter is not the greatest period of activity. These are the holidays, so (inaudible).

And any big clients in review?

Not that I am aware of.

Okay, thank you very much.

Thank you.

Thanks. Our next question comes from Jason Helfstein with Oppenheimer.

Thanks. I will only ask two. Randy, you said the Company had suspended buy-backs in August. I guess you said July was the big month for it. But in the comments you guys talked about attractive acquisition targets. Thinking about next year assuming no additional buy backs, what would you expect the impact of acquisitions to have on annual revenue growth?

Then secondly, based on your experience just thinking back to the last cycle. When we see large mergers between key clients, perhaps automotive or consumer products, what are the ramifications both positive and negative? Thanks.

Well, my comment on share repurchase activity was we suspended it in August, and we won't resume until the financial markets stabilize. I fully suspect they will stabilize at some point. So when you talk about 2009, hopefully the financial markets are going to stabilize before that.

As far as acquisitions, based upon acquisitions that we have closed to date, I think it is probably somewhere around 1% for next year. The pipeline looks very good. It looks the best I have seen in a long time, and the pricing discussions look reasonable at this point. It is not to say that they are going to close, until acquisitions close they don't close. Anything can always seem to derail them. But right now that activity looks pretty good. And your last question, I am sorry, I forgot it.

So in the last cycle when you have seen large mergers between clients like just right now, or thinking about say something happens in the automotive sector between any of the big companies. What are the ramifications historically from (inaudible) both the positive and potentially negative from large mergers between key clients?

Depends if you are on the winning side or on the losing side. It is going to vary situation by situation. We have certainly we think the best agencies in the industry. The quality of their work is second to none. So on average we generally do fairly well in that kind of an environment. But obviously it is going to be dependent upon specific relationships that different people have.

And given your focus on marketing services (inaudible)to some of your competitors, do you think that gives you a leg up in those situations? Or in many cases politics can override what may be sound decision making?

Well, people make -- all people make good decisions. Our clients are some of the smartest marketers in the world. We have we believe the best agencies in their disciplines and on average the best companies are generally going it to do better than the other companies. I feel pretty confident in the quality of our people. In specific situations, we have good competitors as well.

I would say that once you get past the immediate short term of these unknown situations occurring, I can't think over the years of too many situations where we lost a client in a sector, and then over a reasonable period of time following that we weren't able to replace it. And that just gets down to the quality of our brands and the fact that we are focused especially -- we are always focused, but especially focused on the fundamentals right now.

Thank you.

Thank you.

Thanks. Our next question comes from the line of Troy Mastin with William Blair & Company, please go ahead.

Good morning. The first question relates to project oriented revenue in the fourth quarter. I am curious, if there have been any cancellations or delays that you have seen yet. And how much of the spending in the fourth quarter do you feel like you have some visibility into today, if it is zero, 10, 50%? And can you give us a rough idea of how much product oriented revenue you have in the fourth quarter?

In a normal year, it runs about $200 million. And in a normal year it wouldn't be fully confirmed for us until about the second week in November. So we are still in that Netherland of time here, where we know what could happen, and we are waiting for approval.

Some of those projects will definitely come through, but we aren't certain, and we are not able to sit here today and tell you with any certainty as to what is going to occur.

I would suspect it will probably be even later, where people are probably trying to create as much flexibility as they can in their own budgets.

Has any portion of this been executed yet? Or are these all really oriented towards November and December?

Well, the stuff that was scheduled for October is in the process of happening. We were talking about --

There are a large number of projects. So statistically some of it has to have happened, what and how much, I don't know. We can't collect -- we aren't collecting weekly data at that kind of a level.

It does sound like there haven't been wide scale cancellations or delays at least yet? Is that a fair assessment right now?

I don't think widespread cancellations. My guess, the sense I get from a qualitative standpoint is that clients are very cautious; taking a wait and see attitude or wait and see perspective. I would suspect there probably have been delays.

Okay. Great. And then regarding the flexibility that you have in your cost structure and how your accruals work. Can you just give us some idea on how much flexibility you have in the fourth quarter? I am assuming you have some non-cash accruals that are running through the P&L for the first three quarters, that might give you some extra wiggle room in the fourth quarter, if plans come down substantially.

Financially from an accrual point of view, we have a great deal of flexibility. Qualitatively what we elect to do based upon the individual performances we see. We haven't gotten through that assessment yet. I mean, there I think you have to depend on our history in that we will make a very sensible effort to adjust appropriately with the flexibility that we have.

We are not prepared to sacrifice the long-term for short-term gain, because we are running the business on a long-term basis, and at the center of it is talent. Having said that, we are very realistic about what performance is, what the goals and objectives were, and what is fair and not fair. So we haven't gotten through that detailed assessment yet, because we don't yet know the outcomes.

And maybe put in context for me the 10% EPS growth that you have talked about in the past. I imagine in this environment that is not a sacred cow. You don't see a light, that is something that you have to strive for in the fourth quarter given the environment and your need to balance short-term and long-term.

We are not forecasting it at this point. As Randy indicated, the fourth quarter is kind of unusual in that the negative currency hit anticipated by the sudden spike of the US dollar, plus the uncertainty that is there.

Again, we are going to run the business sensibly, from servicing our clients, the retention and acquisition of people. And we will make whatever short-term flexible moves we can make and then we will make sure that the business is in the right shape going out into the future.

Yes, not giving forecasts but with looking at '09, you have got negative -- right now you have got negative 3.5 to 4% FX. On an organic growth basis, there is only a range of what you can achieve in that environment without a change, 10% EPS growth can't be a sacred cow.

Okay. Great. And then I am just curious. If you could give me some qualitative or quantitative sense of how this recession, I'll call it, feels today versus at a similar time in the '01, '02 timeframe? Does this feel like it is going to be more severe? Have a bigger impact on the business than what we saw back then, which really wasn't a consumer recession at all, I suppose?

The last one really wasn't a consumer recession. If you get people to go into auto dealerships they could still get credit to buy cars, whereas that fully hasn't been unwound in this one. Probably the biggest change is the last recession just hit us, and we were in a mode where we were just responding to it. This one we have had a little bit longer period of time to anticipate it.

It doesn't necessarily make it better. It just makes it feel more realistic. So I think credit and the availability of credit to the consumer, makes this different than the four recessions that I have been able to manage through in the past. And there will be open questions until we see the credit markets come back, and some of that credit start to flow more easily.

Okay, good. If I can ask just one final question. The February convert, I wonder if you could just walk us quickly through the range of possible outcomes here? What has to happen for there to be the opportunity to keep the convert in place? I don't know if the spread that exists today is too wide and would undermine your ability to make supplemental interest payments? If you can let us know what has to happen, maybe in today's credit environment you could keep that outstanding. Thanks.

I don't think it is a credit environment. My understanding today is that the convertible bonds market -- that there are significant liquidity problems in the convertible bond funds. As such, I am not sure there is much you could do today to keep the bond outstanding.

We are willing to pay a reasonable cost of financing for the bond, where the stock price is currently traded, the conversion feature of the bond has minimal value, and therefore the one year zero, we should be willing to pay our one year cost of money to keep the bond outstanding. And we would will be willing to do that.

I don't believe today that would be enough to keep all of the bonds outstanding. If the bond comes back, we will fund it by drawing down under our bank facilities and look at our options in the capital markets for refinancing that, or paying it down with our cash flow. We'd obviously prefer to keep the bond outstanding, but that preference is conditioned upon our normal cost of debt, not an exorbitant cost of debt.

Okay. Thank you.

Thank you.

Thanks. And our next question comes from the line of Catriona Fallon with Citi. Please go ahead.

Thank you. A lot of my questions have been answered. Could you comment, Randy, on the net new business of $930 million. What does this mean for organic growth next year? It is a little bit less than what we saw last year?

I don't think one quarter alone means much one way or the other. Historically, I will say in sort of a normal environment, if we looked at kind of our trailing four quarter net new business wins, if we applied sort of a 10 or 12% revenue rate on that, that would be a pretty significant piece of our organic growth in the following 12 months.

Now again that is in a normal environment. Because organic growth consists of the revenue off of net new business wins, but it also consists of increases and decreases in existing accounts or existing account activity. So in an abnormal environment, the existing business may shrink, and the net new business wins accounts for a much higher percentage of your organic growth than in a regular environment.

So it is certainly an important piece. But I think it is hard to predict what is going to happen one year, certainly from one quarter's net new business wins.

Okay. So just doing that math then, 10 to 12% on the low end would be in the 2.5% organic growth for next year. And there could be -- and that is just based on the net new business wins and not the ups and downs of the existing clients.

Right. In a normal environment the net new business, if you apply that 10 or 12% revenue rate, that is someplace maybe around 70% of organic growth in the following 12 months. In a bad economic environment, because your existing base could be coming down, it could be 200% of organic growth. Meaning in these kind of environments, a lot of those normal factors really just don't compute.

Okay. And then is that really what you were implying when you said that you have less visibility into Q4 and into the future? Does this mean that you have actually less revenue that is kind of on the books already? Or that clients are more resistant to sign these long-term contracts?

No. The contracts aren't really long-term. The contract, the current base hasn't changed. The Q4 visibility is really more around project revenue.

There are a couple hundred million dollars of project revenue in Q4 that -- we always have -- there is always a little bit of lack of visibility with that revenue in Q4. Fortunately we don't go through too many recessions. How that project revenue acts in a recession is going to be different recession to recession. And it is different year to year, but it is certainly a lot less visibility, given this economic backdrop.

Going into next year, as John pointed out, there is a lot of wait and see, and a lot of caution. So budgets are getting developed, I think, later this year than normal. Going into any year, we probably have someplace between 85 and 90% of revenue is pretty well-known, which I think for most industries is pretty high. But with 10% of your business not known, in sort of that new business and project category. If you are expecting plus or minus 1% accuracy, 10% is a lot of variability.

Okay. Then my last question is just on the digital spend. Could you give some color as to what percentage of your revenue has to do with digital projects? And how are customers changing the way they are looking at where to spend their dollars going forward.

I haven't tracked digital spend in the quarter to tell you the truth. I think we might have to get back to you on that answer. Typically digital is a very large spectrum of definition. I think everything is going digital, or there is a huge digital component to it.

In terms of maybe this doesn't answer your question exactly, but what we have seen in prior recessions is that budgets which are allocated to new areas of technology and testing the marketplace tend to be the first that get cut back. And people rely on traditional proven methods if a recession is deep enough. It doesn't mean it doesn't get eliminated. It just simply doesn't get funded, or grow as fast, because people have other priorities. But I don't think in the first nine months we have seen much movement, in terms of what the existing budgets were. But I don't have a forecast going forward.

The definition of digital is frankly blending a lot. Our PR businesses have significant digital capabilities now to execute PR strategies in a digital or Internet world.

Our traditional agencies have fairly significant percentages of their business, executing their ideas in the digital media. Then we have standalone digital firms, maybe mostly focused on I will say digital CRM, and maybe some of the heavier technology websites. Again, those are kind of broad statements in all of them.

So it's hard for us to separate out what is digital and what isn't. We get into media buying and planning, they are certainly buying media online or on the Internet, that certainly could be separated out.

Thank you.

Thanks. Our next question comes from the line of Dan Salmon from BMO Capital Markets, please go ahead.

I think this will be our last question. Go ahead, Dan.

Okay. Thanks. I wanted to just dig in for a little bit more detail on the other category in your revenue by territory. The growth rate came down a little bit there. It still remains pretty strong.

I was hoping you could give us a little bit more color on -- with the growth slowing there, how much of that is currency, how much is that organic? And then likewise, how much of that is what we think of the traditional emerging markets, be that the BRIC economies or Southeast Asia or the Middle East, versus some of the more established markets in that grouping?

Wow. It definitely includes the BRIC economies. I think in general the BRIC economies did very well in the quarter from an organic growth standpoint. FX certainly could be a piece of this. FX in places like Brazil over the quarter changed fairly dramatically.

I think going into next year, or frankly going into the fourth quarter, I think the currency from Brazil moved 20 plus percent negative. Going through some the other -- organic growth in the BRIC markets was very substantial. Organic growth in the Middle East was very substantial, as I mentioned. South Africa may have slowed in the quarter. But again some of these changes are relatively small on a dollars basis.

That is helpful. Maybe a little bit more of a broader way to look at it is maybe just to get your thoughts on how that revenue stream -- we hear the phrase decoupling from the US economy. How much -- it looks as if that may correlate to any weakness in the US, the UK, and the Western European markets going forward?

I don't think we necessarily buy into the decoupling theory. Having said that, you can go from China which is still expected to grow in the high-single digits to the US, which you tell me is probably in negative growth.

So I think the US consumer and his lack of vitality, will have an impact on a lot of these manufacturing and exporting nations, which are commodity based. So there will still be a lot of growth there and we are still encouraged by those markets, especially in the long run. There has to be a short term impact.

I think we are also given our international client base, and in many of the emerging markets we have a higher percentage of revenues from our multinational clients than we might normally have. As a result, we are probably even more coupled, than the economies are coupled in general.

Okay. Great. Thank you.

Okay. Thank you all very much. With that, we will call it a morning. Thank you for taking the time to listen to our call.

Great. 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.