Interpublic Group of Companies Inc
NYSE:IPG
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Interpublic Group of Companies Inc
Earnings Call Analysis
Q3-2023 Analysis
Interpublic Group of Companies Inc
The third quarter showed an adjusted EBITDA of $397.2 million, marking an 11.5% increase from the previous year. The EBITDA margin stood at 17.2%. Notably, net revenue amounted to $2.31 billion with a slight organic decrease in revenue before billable expenses by 40 basis points. When taking into account the entirety of the nine months, the organic revenue decrease widened to 80 basis points. This minor decline reflects a cautious macroeconomic environment, affecting primarily the tech and telecom sectors within the integrated advertising and creatively-led solutions segment. However, the media, data, and engagement solutions segment, as well as the specialized communications and exponential solutions segment, exhibited growth, particularly in sports and entertainment, public relations, and exponential disciplines.
The company's focus on expense management has resulted in a 1.5% reduction in net operating expenses from the previous year, achieving an adjusted EBITDA margin growth of 170 basis points to 17.2%. This improvement was aided by a decrease in the ratio of salaries and related expenses as a percentage of net revenue, which dropped 110 basis points to 66.3%. The company's ongoing efforts to control costs related to office and other direct expenses, as well as selling, general, and administrative expenses, have also contributed to margin enhancements.
Diluted earnings per share (EPS) was reported at $1.64 and adjusted at $1.81. The company actively returned capital to shareholders, repurchasing $2.6 million shares during the quarter. The management's approach to capital allocation reinforces their confidence in the underlying value of the company.
The company is committed to keeping its offerings relevant and compelling, with investments in digital capabilities and integrated services. This pursuit has led to the launch of a Unified Retail Media Solution and Real ID in the cloud, both designed to address emerging challenges and opportunities in advertising and data management. The company's AI Steering Committee is continuing strategic oversight of AI pilots and partnerships, revealing a dedicated focus on leveraging AI as a revenue generator and efficiency driver.
The company reported robust growth in its media offerings within the media, data, and engagement solutions segment, although facing headwinds from digital specialty agencies. There's a consolidation under the KINESSO brand to enhance media performance. In the integrated advertising and creatively-led solutions segment, McCann has been a standout with new global client wins. Meanwhile, the specialized communications and exponential solutions segment enjoyed growth across all disciplines, with significant new assignments including work with the CDC. Client wins and service expansions such as those with General Mills, IKEA, and T.J. Maxx, demonstrate the company's strong positioning to capture new business based on its expertise and innovation.
Despite facing a less favorable Q3 than expected, the company anticipates returning to growth in the fourth quarter, with guidance of approximately 1% organic revenue growth. They remain focused on achieving their margin target for the year of 16.7%, surpassing the previous year by 10 basis points. The forthcoming period will involve critical attention to areas of underperformance, with expectations for Q4's typically stronger seasonal performance to aid in accomplishing these goals.
Artificial intelligence (AI) represents a significant investment priority, both for enhancing operational efficiency and opening new revenue streams. The deployment of AI across various departments like Mediabrands and Acxiom demonstrates the company's commitment to innovation and client service enhancement. With a task force comprised of top leaders, the company is charting a future that prioritizes AI as a strategic necessity to stay at the forefront of the rapidly evolving advertising landscape.
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Good morning, and welcome to The Interpublic Group Third Quarter 2023 Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you may begin.
Good morning. Thank you for joining us. This morning, we are joined by our CEO, Philippe Krakowsky; and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern Time.
During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that are included in our earnings release and the slide presentation. These are further detailed in our 10-Q and other filings with the SEC.
We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance.
At this point, it is my pleasure to turn things over to Philippe Krakowsky.
Thank you, Jerry. As usual, this morning, I'll begin with a high-level view of the quarter, after which Ellen will provide additional details. I'll conclude with updates on our agencies to be followed by Q&A.
Before getting to the business of the call, however, it seems not only appropriate but necessary to speak to our collective shock and grief in response to the terrorist attacks perpetrated in Israel and their aftermath. Thankfully, our colleagues in Israel are safely accounted for, but many are being called into service. We're also clearly in the midst of humanitarian crisis in the region. So our thoughts go out to all innocent lives that have been impacted by violence and those who remain in harm's way. Given the scale of our operations in Israel, we'll also spend a bit more time later in the call discussing the implications on IPG's business.
Turning to 3Q performance, starting at the top with revenue. Results did not measure up to expectations. The organic change of our revenue before billable expenses was a decrease of 40 basis points. For the first 9 months of the year, our organic decrease is, therefore, 80 basis points from a year ago, inconsistent with a trailing 3-year growth of 15.7%.
The same factors we've discussed as having impact in the first half of the year continued to weigh on the third quarter. These are, in order of magnitude, the decrease in client activity in the tech and telecom client sector, which has been evident across our industry this year; and the underperformance of our digital specialist agencies. Decreases in both of these areas were at about the same scale as we identified in the second quarter. And together, they weighed on our third quarter growth by approximately 3.2%.
As we've spoken to in recent quarters, major marketers in the technology sector are consumers of our core services. And as a sector, their budgets this year have seen significant cost cutting, in line with the broader austerity efforts at those companies. While it's challenging to call the timing of the upturn in their marketing spend, we do believe that the current pressure on this sector will abate since these market leaders will need to return to growth mode.
Another key factor negatively impacting our results is the broad concern about marketers related to macroeconomic conditions, which we've identified in our previous calls this year. Economic concerns have translated into what is now an unmistakably more cautious tone in the business. We saw those headwinds take several forms, including pauses in certain planned activities, fewer and generally smaller project opportunities and a slower-than-anticipated pace in conversion and onboarding of new business.
Notwithstanding these challenges, it's worth noting that we did see progressively better performance from month to month during the third quarter, with growth in September. We also saw aggregate growth among our top 20 clients in the quarter. We continue to anticipate that the new business that we've won across the first part of this year will be more visible in our results going forward. And as was announced yesterday, we were pleased to see General Mills tap UM as their global media agency of record. UM will handle all strategy, planning, buying, analytics, performance and commerce efforts across 36 markets for this important client.
It's also worth highlighting that in the quarter, we continue to see growth in areas of the business that have been key drivers of success for us over a number of years, namely our media offerings, which performed very strongly; and the health care sector. In addition, we had solid growth in sports and entertainment marketing, public relations and our experiential offerings. 6 of our 8 client sectors grew during the quarter as has been the case in the 9 months year-to-date. We were led in the quarter by the strong growth of auto and transportation followed by our other sector of diversified industrials and public sector clients, the financial services and health care sectors.
Health care grew in the quarter, though not at the more robust levels we had expected. Food and beverage and consumer goods sectors also increased in Q3. We had a slight decrease in the retail sector. The tech and telecom sector decreased in the high teens on a percentage basis. And this is not only due to the larger trend in the sector, but also the significant client loss at McCann.
Regionally, we saw organic growth in the quarter across the U.K., Europe, Latin America and our other markets group. The U.S. and Asia Pacific region decreased. Lower revenue in the U.S. was predominantly due to the sector- and agency-specific challenges we've called out.
As we look to the balance of the year, the geopolitical situation in the Middle East does add a degree of uncertainty to our business. Our operations in Israel include the full range of creative, marketing services and media offerings. And they represent approximately 1% of total IPG global revenue. As you'd expect, economic activity in the country is at a standstill, which has already begun to have an impact during what is seasonally the business' largest quarter. The developing geopolitical crisis is, of course, foremost a human concern. And our top priority is to do what we can to support our colleagues in the region. But in the context of this call, we did feel it was necessary to point out it will also have some business implications.
Turning to segment performance. Media, Data & Engagement Solutions grew organically by 50 basis points in the quarter. We continue to see very strong growth in our media offerings, but that was again largely offset by challenged results at our digital specialty agencies.
Our segment of Integrated Advertising & Creativity Led Solutions decreased 4.1% organically as the tech and telecom client sector and a more cautious spending climate weighed on our more traditional consumer advertising agencies. FCB's strong performance in the quarter was a notable exception, powered by its strategy of incorporating data-informed, audience-led thinking into its core creative offering.
Our segment of Specialized Communications & Experiential Solutions grew by 6.5% organically. The quarter was highlighted by increases in sports and entertainment, experiential and public relations.
Turning to an overview of expenses and margin. Operating discipline continued to be a strength and was fully in evidence during the quarter. Third quarter adjusted EBITA margin was 17.2%, up from 15.5% a year ago. Across the group, we're effectively managing our flexible operating model, which you can see in our expenses for temporary labor, performance-based incentive compensation and SG&A. Total headcount decreased by 1.5% from a year ago. Occupancy expense decreased as well as we continue to benefit from actions taken on our real estate portfolio, and other variable expenses such as travel were a source of operating leverage.
Our diluted earnings per share in the quarter was $0.63 as reported and was $0.70 as adjusted for intangibles, amortization and other items. During the quarter, we repurchased 2.6 million shares, returning $91 million to shareholders. That brings our share repurchases for the 9 months to 6.1 million shares using $219 million.
The strength and strategic relevance of our offerings is evident in our new business wins year-to-date and our long-term record of organic growth. That said, we had anticipated that the puts and takes in Q3 would have netted to better revenue performance than reflected in our results today. And I'll do more to unpack that for you in my closing remarks.
Turning to our outlook for the remainder of this year. Given the trends we've called out for you since the beginning of the year, the fact that macro conditions have become more challenging as well as the incremental impact of geopolitical uncertainty, we believe organic revenue performance for the fourth quarter will come in at approximately 1% growth. Nonetheless, we remain committed to our margin goal for the year of 16.7%.
Our current level of performance is not up to the standards we set over many years. We'll, therefore, be looking to close this year as strongly as possible and specific to identified areas of underperformance, also assess structural internal solutions to improve our growth profile.
At this point, I hand the call over to Ellen for a more detailed review of our results.
Thank you, Philippe. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on Slide 2 of the presentation, our third quarter revenue before billable expenses or net revenue increased 60 basis points from a year ago with an organic decrease of 40 basis points. Our organic decrease was 1.2% in the U.S., while we grew 1.1% organically in our international markets. Over the first 9 months of the year, our organic revenue decrease was 80 basis points.
Third quarter adjusted EBITA was $397.2 million, an increase of 11.5% from a year ago, and margin was 17.2%. Our diluted earnings per share in the quarter was $0.63 as reported and $0.70 as adjusted. The adjustments exclude the after-tax impacts of the amortization of acquired intangibles and on the operating losses on the sales of certain small nonstrategic businesses. We repurchased 2.6 million shares during the quarter and 6.1 million shares in the year's first 9 months.
Turning to Slide 3, where you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow.
Turning to the third quarter revenue in more detail on Slide 4. Our net revenue in the quarter was $2.31 billion. Compared to Q3 '22, the impact of the change in exchange rates was positive 70 basis points with the U.S. dollar weaker against the euro, pound and several LatAm currencies compared to last year but stronger against most currencies in Asia Pac and the Canadian dollar. Our net acquisitions added 30 basis points. Our organic decrease of revenue before billable expenses was 40 basis points. For the 9 months, our organic decrease was 80 basis points.
The performance of our segments is at the bottom of the slide. Our Media, Data & Engagement Solutions segment grew organically by 50 basis points. We had very strong global growth at our media businesses, though that was largely offset by the continued underperformance by our digital specialist agencies.
Our Integrated Advertising & Creativity Led Solutions segment decreased organically by 4.1%. Lower revenue from clients in the tech and telecom sector and a more challenging macro environment was felt broadly across our more traditional consumer-facing agencies.
At our Specialized Communications & Experiential Solutions segment, organic growth was 6.5% with growth across our sports and entertainment, public relations and experiential disciplines.
Moving on to Slide 5 and organic net revenue growth by region. In the U.S., which was 65% of our revenue before billable expenses in the quarter, our organic decrease was 1.2% against 4.4% growth in last year's third quarter. Decreases among tech and telecom sector clients and a more cautious macroeconomic environment continued to weigh on our performance, notably at our digital specialists and at most of our creatively led agencies. We had strong growth at our media offerings followed by increases at our sports and entertainment, experiential and public relations disciplines.
International markets, which was 35% of our net revenue, grew organically 1.1% in the quarter on top of 7.8% a year ago. U.K., which was 8% of net revenue in the quarter, grew 2.2% organically on top of 4.9% a year ago. Growth was led by IPG Mediabrands, McCann and FCB.
Continental Europe, which was 8% of net revenue, grew 3.9% organically in the quarter, compounding last year's 4.7% growth. We were led by growth in Spain and Germany as well as slight increases in smaller national markets.
Asia Pac was also 8% of net revenue in the quarter. Our organic decrease was 5% compared to 5.6% growth a year ago due to decreases in Japan and China.
In LatAm, which was 5% of net revenue, our organic growth was 5.7% on top of 19.8% a year ago with increases across all national markets led by Colombia and Argentina. In our other markets group, which is Canada, the Middle East and Africa, we grew 1.2% on top of 10.6% a year ago.
Moving on to Slide 6 and operating expenses in the quarter. Our net operating expenses, which excludes billable expenses, the amortization of acquired intangibles and restructuring adjustments, decreased 1.5% from a year ago compared with the growth in reported net revenue of 60 basis points. The result was an adjusted EBITA margin of 17.2%, an increase of 170 basis points from a year ago.
As you can see on this slide, our ratio of total salaries and related expense as a percentage of net revenue decreased by 110 basis points to 66.3% from 67.4% in last year's third quarter. Compared to last year, we delevered on our expense for base payroll, benefits and tax while our expense for temporary labor, employee incentive compensation and severance decreased as a percent of net revenue. Each of these ratios is shown in the appendix on Slide 31.
Headcount at quarter end was 57,700, a decrease of 1.5% from a year ago. Also on the slide, our office and other direct expense was 13.8% of net revenue compared with 14.3% in Q3 '22. Underneath that improvement, we continue to leverage our expense for occupancy and all other office and other expense. Our SG&A expense was 70 basis points of net revenue, an improvement of 10 basis points.
On Slide 7, we present the detail on adjustments to reported third quarter results in order to provide better transparency and a picture of comparable performance. This begins on the left-hand side with reported results and from left to right, steps through to adjusted EBITA and our adjusted diluted EPS.
Our expense for the amortization of acquired intangibles in the second column, was $21 million. The adjustments to previous restructuring actions was a credit of $600,000. Below operating expenses and shown in column 4, we had a loss of $12.1 million in other expenses that was due to disposition of a few small nonstrategic businesses. At the foot of the slide, you can see the after-tax impact per diluted share of each adjustment, which bridges our diluted EPS as reported at $0.63 to adjusted earnings of $0.70 per diluted share.
Slide 8 depicts similar adjustments for the 9 months. Our diluted earnings per share was $1.64 as reported and $1.81 as adjusted. As a reminder, reported and adjusted EPS for the year-to-date period includes the benefit of $0.17 per share recorded to our tax provision in this year's second quarter.
On Slide 9, we turn to cash flow in the quarter. Cash from operations was $242.7 million, and operating cash flow before working capital was $365.4 million. As a reminder, our operating cash flow is highly seasonal and can be volatile by quarter due to changes in the working capital component. In our investing activities, we used $48.6 million, essentially all of which was towards CapEx in the quarter. Our financing activities used $225.5 million, mainly reflecting capital return to shareholders. Our net decrease in cash for the quarter was $52.7 million.
Slide 10 is the current portion of our balance sheet. We ended the quarter with $1.57 billion of cash and equivalents and $102 million in short-term marketable securities to be held to maturity, which is before year-end.
Slide 11 depicts the maturities of our outstanding debt. As you can see on this schedule, total debt at quarter end was $3.2 billion. That includes our $300 million 10-year note, which we issued in June to prefund our $250 million maturity in April of next year. Thereafter, our next maturity is not until 2028.
In summary, on Slide 12, our strong financial discipline continues. And the strength of our balance sheet and liquidity mean that we remain well positioned, both financially as well as commercially.
And with that, I'll turn it back to Philippe.
Thanks, Ellen. Without question, organic revenue performance to date this year is not consistent with our expectations or our long-term track record. We continue to be in market with relevant and compelling offerings that are helping marketers accelerate growth and deliver business outcomes. And that has translated to new business success year-to-date.
Now for many of you who've been with us over a period of years, you know that we were among the first to embed digital capabilities across media, health care and many of our marketing services as well as to recognize the importance of the integrated services and increasingly complex consumer ecosystem.
Similarly, we were early to understand the growing importance of data resources and first-party data capabilities at scale as key tools to power the success of our clients. Given the very rapid rate of change we're all experiencing, we continue to further evolve our offerings, investing in ways that help brands compete in a dynamic world of new technology platforms and empowered consumers. This work has meant that increasingly large portions of our portfolio are better-oriented secular areas of growth.
Consistent with that objective, during the quarter, we launched our Unified Retail Media Solution, which is a dedicated business unit within Mediabrands. It helps clients manage their investments across all retail media networks, one of the fastest-growing advertising channels. That solution is already helping brands maximize their media investments across all of the retail channels in real time in order to drive next best business outcomes.
Earlier this week, we also launched Real ID in the cloud, the tool powered by Acxiom and piloted at FCB. It modernizes identity resolution and addresses an industry need for identity tools in a post-cookie world. Built on ethically sourced data that prioritizes consumer privacy, Real ID creates the opportunity for us to do the kind of intelligent data-driven work that we've been doing in media for some time across all marketing channels and disciplines.
Our AI Steering Committee includes leaders from across our network. And it continues its work overseeing strategic partnerships and sharing use cases across the group. As you know, we've been using machine learning and other AI tools in our data and media business for a number of years. With hundreds of new AI pilots underway across the company, we're tracking a subset of promising programs with a particular focus on 3 new areas: first, using AI to generate content, including text, images, audio and video in our ideation and creative processes; second, AI as a tool to uncover kind of strategy and insights as well as business trends that can help our clients and their brands; and finally, piloting the use of intelligent chat bots to automate tasks like program recommendations and other key steps on consumers' e-commerce journeys.
Given the impact AI will continue to have on all businesses, including ours, we're fully engaged with leading AI innovators, which is Adobe, Amazon, Google, Microsoft, NVIDIA and Salesforce. For example, during the quarter, NVIDIA worked with us, specifically within our PR agencies, to incorporate AI-enabled processes into earned media and corporate communications workflows.
And just to step back and talk a bit again about our reporting segments in some detail. As discussed earlier, within the MD&E segment, we had very strong growth at our media offerings, but that continued to be largely offset by challenges within the digital specialty agencies. I think notably, during the quarter, we brought 3 distinct media brand companies, Kinesso, Matterkind and Reprise under the Kinesso banner and brand to create a unified tech-driven performance unit that enhances the effectiveness, efficiency and simplicity of media activation that is end-to-end across that value chain.
And as mentioned earlier, General Mills is another great piece of news in Mediabrands. During the quarter, Acxiom announced that its info-based consumer insights and audiences are now available in cloud data exchanges and received a Salesforce Partner Innovation Award for work it's doing with its Heathrow client. The company also recently launched Acxiom Health, which is its latest vertical offering and provides advertisers with quality audiences that span both consumers and health care providers with more effective reach and precision.
At Huge, the agency had a number of wins with their new suite of consultative products that are tailored to specific client business problems, which allows them -- deliver strategy through execution very rapidly and effectively. The agency expanded its relationship with Darling Ingredients, which was -- begun earlier this year with a significant design and build project. And on the product development side, Huge launched what it called the AI opportunity mapper, which help clients anticipate big shifts that gen AI will have in their specific industry and identify opportunities for growth across near-, mid- and long-term horizons.
Looking at R/GA. The agency announced new business wins in the U.S. for Bloomberg and the BBC and in LatAm for Banco Safra, which is Brazil's premier financial institution. R/GA also launched The Associates program, a unique approach to fractional hiring that offers flexibility and emphasizes adaptability and creativity. And the agency's work for clients like Procter & Gamble and the Ad Council was recently recognized as a finalist for Fast Company's Innovation by Design Awards.
Within the IAC segment, as we mentioned, tech and telco weigh on our more traditional consumer advertising agencies, but FCB was a notable exception to that. The network is playing a key role in our integrated Pfizer team and also expanded relationships with existing clients, which is -- sorry about that with new clients such as Diageo, Danone and Upfield in global markets.
IPG's health -- IPG Health's focus on creativity, technology and data continue to be key to their clients. And during the quarter, the network launched the industry's first clinical trial diversity offering designed to help pharma and health care companies ensure more inclusive treatment innovations.
Last month, following a competitive pitch process, IKEA chose McCann as its first global brand marketing partner. Domestically, T.J. Maxx hired McCann as its creative AOR, and Reckitt's Durex brand named MRM and McCann as brand leads in Europe and the U.S. In addition, the network launched McCann Content Studios, its new global hub for social and creator services.
MullenLowe retained the DHRA account, which is the arm of the U.S. Department of Defense, it's focused on military recruitment across all service branches. This renewal is for 5 years with an expanded remit that includes advertising, CRM, database management, integrated media, social, digital and PR.
Our SC&E Solutions segment, as we mentioned, saw growth across all disciplines. Following a strong new business track record year-to-date in Q3, Golin won new business including Eve Air Mobility, Tapestry, the luxury brand holding company that owns Coach and Kate Spade as well as Neutrogena, the [indiscernible] skincare brand.
Momentum grew strongly with core clients, including Verizon and Nike and brought on a number of new clients, notably John Deere. Most recently, the company secured 3 AI patents for the machine learning of experiences, which makes them the first agency to do so in their area of expertise.
Octagon signed the ACC as a new client at their industry-leading media rights division. And the agency won new client brands, including Hilton Hotels and [ Powerade ] as well as working with current clients, Budweiser, Mastercard and Unilever, to manage activations at major global sporting events. Jack Morton, Vivi, the agency's diversity driven inclusive marketing practice, posted wins and new work with the NBA and TIAA. There are also additional new client adds with Paramount Plus and Comcast and a large-scale reinvigoration of ESPN's SportsCenter.
Weber Shandwick saw growth in the health sector and in its government and public policy work. On the new business front, notable wins included Dollar Shave Club and a significant new assignment with the CDC. The network also expanded its predictive analytics and intelligence capability with the rollout of a new proprietary solution that measures the impact of earned media.
Despite these highlights from across the portfolio, as you can see from our results, the third quarter didn't unfold along the lines we'd envisioned when we spoke with you in July. At that time, we shared our view of the second half inflection point for stronger growth driven by several factors.
One was accelerating growth of our media business, which did materialize with notably stronger performance in the third quarter than we've seen earlier in the year. We also look forward to a similar trajectory in our health care vertical. And while health care did grow in the quarter across the category, it was not at the level we had anticipated. However, with new business coming online stronger in Q4, we do see health returning to its more typical rate of revenue growth.
And as I mentioned earlier, during Q3, while we saw the impact of new business coming on stream, it was slower to convert than the rate which we had foreseen. Therefore, when we look to the fourth quarter, as mentioned earlier, and this is historically our largest due to seasonal factors as you all know, we believe organic revenue performance will come in at approximately 1% growth.
And also, to reiterate, we remain committed to our margin target for the year of 16.7%, 10 basis points ahead of last year. We're going to stay focused on closing the year as strongly as possible. But as I mentioned earlier, we're also, specific to areas of underperformance, assessing structural solutions to improve our growth profile.
And an important additional area for value creation is our long-standing and continued commitment to capital returns, which has been underscored by the execution of our share repurchase plan and consistent dividend growth over time. These remain important priorities for us going forward.
As always, we thank you for your time and attention. And with that, let's open the floor to your questions.
[Operator Instructions] Our first question is from Adrien de Saint Hilaire with Bank of America.
Yes. A couple of questions, please. So first of all, can you help us quantify the impact of the tailwinds that you alluded to from new account wins from perhaps recovery in tech into 2024?
And then maybe a second question for Ellen. So clearly, an amazing job this year in terms of protecting the margin. Is there a risk that as growth resumes next year and as you onboard new clients, we see cost growth effectively exceed revenue growth in 2024?
Sure. I will take the one you gave me and then a little bit of the one that you sent to Ellen, if I may. I don't know that we can quantify the tailwinds for '24 because we're not through to the end of the year. So we're clearly from a net new business perspective as we sit here this year, positive. And there are still a few fairly sizable opportunities out there for us to go get. But we do think that we'll be heading into '24 with the benefits of the wins from this year. And then unfortunately, some of the benefits of the fact that there's been a little bit of a slowdown in terms of onboarding them, and I don't think we can give you a quantified number for that quite yet.
And then I think that as I mentioned in passing, when you think about third quarter, there was an expectation on our part that on just the kind of work that you pick up course of business, not the sizable opportunities out there, that isn't converting at the rate at which we're used to seeing. So that's something we're just going to have to monitor through the end of the year so that we can then give you line of sight into how we are going into '24.
And then I'll hand over to Ellen, but I'll obviously point out that when there's growth, we do grow margins. So as we return to growth, I'm not sure that, that the cost question should be a concern.
Now, just to add to Philippe's comments, I mean, we've been very disciplined about not hiring ahead of revenue as well as being able to really, as you've seen this year included, really manage a flexible cost structure. So we do see the ability to continue to increase our margins.
The next question is from David Karnovsky with JPMorgan.
Philippe, you noted that IPG would assess internal structural solutions to improve growth. I wanted to see if you could expand on what that means exactly. And then just regarding the commentary you gave on health care before and that not performing as expected in Q3, was that largely related to new business? Or were there other factors? And just like new account wins aside, how do you kind of assess the health of that vertical?
I'll take them in reverse order, if I may. So health, as you know, a very, very strong performer for us over a long period of time. So I think it was a period, in which it was probably 14% or 15% of our overall revenue, and it's now likely twice that. And long term, we see it as a sector that still sets up well for growth. So that's a strength in terms of our asset and business mix.
What it didn't do this quarter is what I was actually just referring to in Adrien's question, which is some of the [ TBG ] conversion in the non-high profile opportunities was not at the rate at which we expect from them. And yet as we look at fourth quarter and what has been brought in, we think it will get back to the levels that we see from a strong performer in the group.
And in terms of health care, anything else -- I guess there were 1 or 2, but it's course of business where you have a drug that has a lot of expectancy attached to it, where there is going to be a meaningful budget, where it fails late in an approval process. But that's something we do factor in. We did happen to see 1 or 2 of those in the quarter.
Now relative to your first question, I do think it bears going into a bit more detail. So how I would frame it up for you is this. The comment is specific to parts of the portfolio that have been underperforming and have been taxing overall performance this year. And if you think about the long-term history of those digital specialty assets, it's one where they've successfully gone through cycles of transformation every 4 or 5 years. So as we head into the year, to us that meant there was a reason to be supportive as they look to make the necessary adaptation.
But sitting where we are now, if you look at the weighting to technology clients that they have and then the speed of change in the operating environment, this has made it an especially difficult time, both for what they do and for them to essentially reboot or reinvest. And then when it comes to tech specifically, I don't know that any of us have seen it retrench to the degree we've experienced or for this long -- this prolonged, a period of time. So we clearly have to ramp up the urgency on this front and be open to a broader range of solutions. And of course, those are conversations that involve the leaders of those operations, as you'd expect, and that are ongoing.
It's not something that we're in a position where I can say to you right now, here's what we're going to do or not. But if you wanted sort of a broad guideline, if you look at our strongest performers across the portfolio, so the framework for what success should look like, and I think that could be helpful, whether it's health care or Mediabrands, you have a coordinated approach to how you go to market. You benefit from scale. You're looking for ways to share complementary skill sets and identify very clearly where the centers of excellence sit across multiple units.
And I think it's all in the service of making it simpler for clients to engage with us. So I think those are the guidelines for us. I think we're going to look to define a way forward in terms of putting something into effect with a number of those assets as we head into '24. So I hope that frames it up for you, David, but I mean, I can't give you a definitive answer.
The next question is from Ben Swinburne with Morgan Stanley.
Thanks for all the color earlier on the different segments, headwinds and tailwinds. I was wondering if you could just spend a minute, every agency, holding company kind of reports differently, as you know. So it's hard to compare, but we try anyway.
Your IAC segment, which does not include R/GA and Huge, it's down 4.5% year-to-date. You talked about the health care business, that's still growing. You mentioned an account loss in McCann in your prepared remarks. But do you think -- is there a sort of underlying share erosion happening here? Or is this just kind of creative is just a tougher business? I mean, we know it's a tough business, tougher than it used to be. But just any more sort of high-level comments on how you're feeling about the assets within that group because that's obviously not including the digital specialty agencies.
And then I guess, just a question around kind of AI, which was maybe everyone's question back in January and February. How much of an investment priority is that for you guys internally? Because protecting margins and margin expansion is something people obviously want and expect from IPG. But I'm sure you're also keeping your eye on the long game here and not wanting to miss anything as it relates to investing in tech and talent on the -- particularly on the AI front.
Okay. On your first question, I think that across the industry over the last year or more, in fact, you've seen folks call out that the more "the traditional consumer advertising" portion of all of our businesses is under some stress as you put it.
So within IAC, you've got our health care business, which we spoke about. You've got FCB, which again, I think we did speak to how they've leaned into incorporating data and precision thinking sort of an audience-led approach and married it up to a very, very creative offering.
And so for us, the rest of what is in that grouping is McCann, which is on that same path. And then a group of kind of a portfolio of U.S. independent agencies where we do, again, I think, need to look a bit as sort of part of the answer that I shared with David around what does scale look like? How are we clear about centers of excellence? How do we get complementary skill sets working together? And what's a simpler way for clients to engage there and for us just to be kind of have a flying formation for that grouping?
So I think IAC definitely needs -- not unique to us, right? As you called it out, that's a part of the business where I think everybody is thinking about what the right way to integrate that. When you take creativity and is part of an integrated offering, it's definitely much more powerful.
And then on the AI question, it is an investment priority. It has been for some time, as I said to you, because whether it's inside of Mediabrands or at Acxiom, there's quite a bit we've been doing there, and ways in which AI is going to make it possible for us to get more done for clients or work smarter and take a lot of processes we have. So from an efficiency point of view, it's clearly going to be a boon. But we also think it's going to open up opportunities to -- there's so much demand for content at this point, given how many channels there are and how complex the consumer journey is across this incredibly fragmented tech ecosystem that we still see opportunities to also have it be a revenue generator.
So as I said, we've got an AI task force that has a handful of the top leaders from across the group. And that's probably going to then become something that gets leadership at the center here, and we prioritize investment that way.
And the next question is from Michael Nathanson with MoffettNathanson.
Okay. So this is a long-running Q&A we've been having. I guess when you get...
[indiscernible] know what the question is.
Okay. Exactly. When you look at Media, Data & Engagement and backing away R/GA and Huge, just taking it out, we're used to you guys growing top of the leaderboard. And this year is going to struggle, we know that.
But I wonder, when you look at some of your competitors, those who have bought data assets and those that have not, look at what's happening under your hood, what do you think about the strategic pivot that you made? What is slowing down maybe the growth ex those digital specialist assets? And is this something that you think strategically is on the wrong foot or is just execution? Because we see other companies just growing faster. And I know your comps are hard, but I wonder like what do you think about the decisions you made to get here or just basically a tough year that bounces back next year.
Look, I mean, we've got a terrific media offering to your point, and I think that's been clear, both in what we keep saying about the performance there and in the new business performance year-to-date if you sort of consider major pitches from GEICO at the early part of the year all the way through General Mills, which was yesterday.
That said, I will -- I think you're clear, you have a point of view, and it could very well be that we are missing out an additional source of growth there, right? So I think the question's come up before. It's a very valid question. And we clearly have to be open to exploring every avenue for delivering value to our clients. And that includes our trading model, by which I mean how we buy media on their behalf, right? So clients value product and results. We're very strong in that regard. They also value efficiency, and we have to deliver on both sides of that equation on both fronts.
So I think that like you said, it's been a conversation we've had on a call like this one and then just when we've met independent of this. And we're looking very hard at our model within the media component of this for that reason because you're right. I mean, there's no upside in leaving growth on the table.
Got it. And then can I ask one to Ellen? Billable expenses. I know there's no media there, given what we know. The growth was pretty strong this quarter. Can you tell us what was that tied to?
Sure. I think it's consistent with the growth you saw in our SC&E segment.
Okay. So netted out, some don't, clearly.
Those billable expenses are predominantly associated with that segment, and that segment grew nicely. So...
The next question is from Steven Cahall with Wells Fargo.
So Philippe, you talked about the 3.2 percentage points growth drag from tech and telco in digital. And I don't think that was too new from Q2 to Q3 because we've talked about that a lot this year. And same with the macro concerns, I just know we've been talking about those this year.
So I guess my question is what has changed most from your perspective over the last 3 months? It seems like the business did deteriorate in some ways versus your prior expectations. I think we're trying to understand what of that is idiosyncratic related to a lot of the agencies you've talked about? And then what might be just more broad-based that can really flow and extend into a great deal of next year? So just love to have some incremental color on what's changed the most more recently.
And then, Ellen, you said you're not hiring ahead of revenue. A lot of the labor market stats indicate things are pretty tight, but I've seen a lot of industry trade reports that there's also a lot of headcount reduction. So when you look at the labor market today, do you think it's a buyer's market for the skills you need? Or is it a seller's market?
All right. Let me unpack that because I think most of the pieces are out there to your point. So the tech, telco and the specific entities within our world that, as I said, are taxing our performance is not new news. Over the normal course of business, there's always revenue to be generated.
And I think your budget, your existing book and then that [ TBG ] and the operators are accountable for both creating those opportunities and converting those opportunities with existing clients as well as winning ones with new clients. And I think that the incremental drag in Q3 was really there and to a much lesser extent, that some of the larger new business did not ramp at the pace that we anticipated.
I'd sort of say that we don't like to see the delta because we've obviously been on the other side of that for some time. But I don't see that the delta to our key competitors has changed over the course of this year. And so there is some of what's been on this call, which is things we talked about, what I just mentioned to you, and then potentially the question Michael asked around media, a client mix question or perhaps to some degree, asset mix positive to us over time. Now clearly, there's one competitor who, credit to them, is benefiting from asset mix. But I don't know that there's anything seen outside of those that gets me to a dramatically different perspective.
And then looking at our workforce, if you're looking for broad-based trends based upon your question, if I go back post the pandemic, labor was tight, attrition was high. Those trends have attenuated. But we're not one business, as you know. We are many businesses, and we recruit many different types of talent.
So where the skill sets more scarce, there is that supply and demand mix. But we have a truly great labor force and our talent. And so we are very competitive in that regard. But the broad-based trends that were called out post the pandemic, those have attenuated a bit.
And our next question is from Tim Nollen with Macquarie.
Just I wonder if you could give a little bit more explanation around the new business trends. You've said it 2 or 3 times on this call that you've seen some, I guess, delays in the conversion and onboarding of some of the wins that you've been talking about for a little while is supposed to come through in the second half. I mean, maybe this happens sometimes. I just don't really recall that occurrence before. I just wonder if you can explain, is it part of these new clients seeing the slowdowns and worrying about spending in the fourth quarter and just sort of deciding to go slower? Or is it a change in the scope of work that's coming on and just haven't really heard that commentary before.
And relatedly, the General Mills win sounds pretty big. I didn't check the numbers. I wonder if you could just help us maybe scope out kind of, of the long list of wins that you've had in the last several months, like which are the biggest ones?
I think on the large headline wins, that's the onboarding of those at a modestly lower -- a slower pace is not the key driver. It's what Steven was just asking about around, I think that it's the [ TBG ] conversion that I would really point to in Q3.
And then in terms of scale, I think we've got quite a few. I mean, so from GEICO at the -- I think General Mills is at the scale of a GEICO, Bristol-Myers Squibb is maybe modestly smaller than that, Constellation Brands is sizable. They do cluster into the media sector. And then Pfizer is very large and is probably different in that clearly, it was integrated across creative, the health and medical communications and expertise in public relations.
And some are global one like that or General Mills, whereas a GEICO or a -- I mean, a Constellation Brands are domestic. But I do think that, as I said, it's not the scale. We have one of the larger wins that is onboarding a bit more slowly than anticipated. But broadly speaking, it's [ TBG ] conversion.
I mean, Ellen can -- at some point, we can break down for you kind of given as she said, it's a lot of businesses inside a business, and a lot of them are project businesses. So where we drive new business is still significantly in the day-to-day converting of work at a much more local level.
The next question is from Jason Bazinet with Citi.
Just had a quick question on the tech, telco weakness that you called out. When do we begin to lap that? Would you say that's a second quarter event? I think that's a first quarter number. Or is it more Q1 of next year?
Well, I mean, I think tech specifically, we would have been largely through it. But as I did call out, we had a significant loss at McCann in the telco space, which is then going to extend that into next year.
And then I don't think health falls into the same category. I think health is really just -- we expected more from that sector this quarter than we've seen, but that's not a long-term hedge-into-next-year drag.
Our next question is from Julien Roch with Barclays.
Two, if I may. I was hoping you could give us the number of employees at Huge and R/GA today. And the second question is margin versus growth next year. So previously, it's doing 5% top line growth and Omnicom 4% for the full year if they make that number in Q4 on flat margin, i.e., their cost including employees are up 4% to 5%, while you're flat. So as talent and this investment intake is key to growth in agency land, could that be an issue for next year?
I don't know that we would break out the by unit employee numbers. I think the second question is a good question. And to Ellen's point earlier, I mean, we are running a portfolio of businesses. And as you could see, a number of them, quite a few of them, whether it's media, health, a lot of the experiential PR businesses are performing well for us. And others are going through some challenges.
So I don't know that you approach the comp component of it similarly across the board, and we have it for quite a few years. So we've been finding talent in the growth businesses, which means that we're able to compensate them appropriately.
And when you look at the model as it is now, you see a number for us which is an all-in number, and it averages out. But what you're seeing in there are a range of outcomes or a range of realities and making sure that we are rewarding and investing the folks who are driving the performance and who are the strong performers shouldn't be an issue.
And there's very -- there's clarity across our group and all of our operators in terms of how their incentives are very, very directly aligned to our results and what we're accountable to you all for. People understand where and how they're earning the compensation. So I don't see that as a meaningful concern.
And that was our last question. I'll now turn it back to Philippe for any final thoughts.
Thank you, Sue. Again, thank you all for the time. And we look forward to sharing better news with you in February.
Thank you. This concludes today's conference. You may disconnect at this time.