Ipsos SA
PAR:IPS
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Ipsos SA
Earnings Call Analysis
Q3-2023 Analysis
Ipsos SA
The company is in the process of launching a suite of AI-powered solutions, a pursuit that aligns with their innovative character as recently acknowledged in the GRIT report. They're also deploying concerted efforts in Environmental, Social, and Governance (ESG), an area that's become intrinsic to their business model and is likely to fuel growth in the beauty sector where they have a strong presence.
With an eye on steady progress, the company maintains that they are on track for organic growth of 3% to 4% for the year, along with a stable operating margin around 13%. The order book at the end of the third quarter echoes this sentiment, falling in line with the provided guidance. The expectation for the fourth quarter is an uptick in growth, largely due to favorable comparative figures from the previous year.
Looking ahead, the company observes promising signs with good orders already in place for 2024, suggestive of an expanding future revenue base, albeit currently a modest component of overall sales. They show active engagement in strategic acquisitions, particularly in public affairs and healthcare, which is complemented by negotiations with larger targets that could yield substantial growth opportunities.
The negative foreign exchange effect of 6.7% has weighed on the company's sales growth, yet the impact on operating margins has remained relatively marginal, due to local currency costs. For the fourth quarter, the company is confident about achieving high single-digit growth, driven by easier year-over-year comparisons and positive momentum in various sectors.
While they navigate disruptions in tech and the Consumer Packaged Goods (CPG) sector, the company maintains a cautious optimism about more regular growth moving forward. Election cycles, particularly in the U.S., are expected to bring only a small incremental revenue, with any new governmental changes likely to induce temporary pauses in client activities until new policies are established.
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Good morning, everybody. It's -- thank you for joining us. I'm joined today by Dan Levy, our CFO, and it's our pleasure to just to take you through the results for the last 3 months of -- in the third quarter of 2023. As we've been communicating this year, the profile of revenue growth in 2023 is very different from 2022. We had a very -- where we started very strongly and then slowed down during the year. This year, as we discussed at the beginning of the year, we are seeing the acceleration that we predicted. And so the quarter's revenue is EUR 588 million, and that means that the organic growth has gone from minus 2.8% in the start of the year, where, of course, there was a very strong comparison with 2022, which meant, of course, that we were always going to struggle to meet that plus 0.5% and now in the last quarter, 4.3%. So there's a very clear acceleration and one which we expect to continue.We've also now left, of course, behind the COVID cliff edge that we had from the very large volume of jobs on COVID during the pandemic, and that was, in some ways, distorting our comparative. That is now over, and we should see further good growth in the next quarter. Dan?
Thank you, Ben. So starting with our performance by region. All region in Q3 are growing -- are showing organic growth, and we see the acceleration in growth in all of them. The activity in EMEA shows a very good momentum with a growth close to 7%, mainly driven by European -- Continental Europe and particularly France, which is doing a very good performance in Q3. And as Ben said, this is the first quarter when we don't see any more any negative base effect relating to the end of large COVID contracts. Business in America is growing by a bit more than 2%. This is showing contrasted reality between Latin America on the one hand, which is growing by 8% and North America, which is growing by a bit less than 2%. In the United States, obviously, we are impacted by the declining demand from major tech clients, which continue to wait during the summer. But as we said, we are still seeing some interesting discussion -- ongoing discussion with these big tech clients, both on traditional market research, things like product testing, mystery shopping, brand tracking but also a lot of new opportunities around generative AI. And we have a very encouraging pipeline.On Asia Pacific, we are recording a 3.1% organic growth. Again, a very contrasted situation between China, which is obviously impacted by the weakness of the economic rebound in this country. And on the other hand, other countries in Asia and particularly India and Southeast Asia, which are recording a double-digit growth.If we now turn to the performance by sector. All sectors show sound growth, except obviously TMT, which is impacted by the big tech. The first one, which is, as you know, our most important sector, the CPG sector, which represents 1/4 of revenue has happened to be quite resilient given the macro context, with a growth of 6% in organic in Q3. I think these clients -- these CPG clients succeeded in passing inflation on their prices and, as a consequence, improved their margin and are investing and keeping investing on innovation. As I said, TMT is mainly impacted by the big tech clients.The pharma sector is improving significantly. We had a difficult start of 2023 and a difficult end in 2022 in the pharma sector. It has clearly keeping improving quarter-by-quarter this year. These clients have now completed their reorganization, post-COVID, and we have also seen an increase in drug approvals in 2023 as compared to last year, which obviously drives the demand for market research.Public sector is growing double digit, plus 17%. As Ben said before, it is the first quarter when we don't see any more effect of the -- end of the large COVID contract. And I'm not commenting on the rest of the sectors. But as you can see, they all show a sound growth in Q3.Breakdown by audience, I'm not going to be too long on that, as I mentioned, most of the drivers. Consumers, our activity with consumers, are growing by 8.3% organically, mainly driven by brand tracking, marketing optimization and our qualitative service line. Clients and employees is clearly the audience, which is the more impacted -- the most impacted by the difficulty in the declining demand in the big tech, which explains the minus 3.3%. Citizens is growing by nearly 3%. and doctors and patients, as I said, is catching up in line with the pharma sector growing by 6% this quarter.And now over to Ben for a bit more detail on the business.
Thank you very much, Dan. So if you look at 2 of our biggest challenges this year, big tech, obviously, that's down because of the retrenchment that the post-pandemic situations saw imposed on many of the big players in that market. The chart that we're showing you here shows the acceleration in revenue growth between 2019, 2020, '21, '22, you can then see the downturn. So we're still doing more work for them year-to-date than we had done in any year except the boom of 2022. And I think that the disruption in the sector that's been introduced by the arrival of generative AI as a mass market tool is leading to more activity. And we should expect to see further developments in that area because you've just seen the results of 2 of the largest players this week; and with very contrasting performances because of the impact of generative AI. So many, many of these players are now working out their strategy. And in many cases, we will be helping them with that as well, of course, as rolling out AI in our own solutions. China, of course, a market where, to be honest, I, like a lot of observers, was expecting a post-COVID rebound and the reopening of the economy, similar to things that we had seen in North America and in Europe when lockdowns had ended. That, of course, hasn't happened, and it's been a pretty weak recovery. Ipsos remains #1 in that market and larger than all the local players. We're expecting things to pick up. We can see that in areas like food and beverage because consumer spending is picking up particularly on things like travel and eating out after people have been in lockdown for such a long time in China. We can also see areas like pharmaceuticals, obviously, electric vehicles where China is heading to be the #1 player globally and things like e-commerce, where the market is incredibly dynamic, are all positive for us. But overall, China as a whole has been disappointing this year.In other areas, on health care, this is a business where we have a new leader, Bonnie Bain. I think, again, the pandemic has been disruptive of course, opportunities for many of these players during the pandemic, but then post pandemic, the need to restructure and adjust to changing marketplaces, along with the change in the drug approvals that Dan has already mentioned. So we can see some good trends there as companies resume their new strategies for the post-pandemic world and some big opportunities in areas like noninterventional studies where our real-world evidence ability is extremely helpful.There's also actually increasing interest in the area of ESG from this sector because, of course, if you're disposing of billions of pieces of single-use plastic, you start to wonder about your impact in a world that is driving towards carbon reduction and protection of the environment. So for all those reasons, we can see business picking up in this area despite disruption, again caused by the end of the pandemic.We've also, this month, [indiscernible] quarter updated our new services portfolio. And this is the first time in about 8 or 9 years, I think, that we've done this. So we reviewed all of our portfolio, and we took out things that were new 9 years ago, but are no longer new, like research on mobile phones. And what we've done is grouped together then for you, our work around platforms like Ipsos Digital, Synthesio, Simstore and Ipsos RISE, which I'll talk about in a minute. All of our work on ESG, which was much less of an issue back in 2014. Our work on science and data, data analytics, our generative AI, the new sorts of tools that we do in our award-winning work for the World Bank with remote sensing, using satellite and other data. And then finally, our increasing advisory portfolio; using research, but providing advice based on that research. When you look at all of those businesses together, they are actually growing about 14%, 20% of our total revenue. Ipsos Digital currently up 35%. And obviously, we are aiming for more as we put more and more work onto that platform. So it's interesting to see the acceleration well above the rest of the company in those new services, reflecting the focus and investment that we're putting into them.And on that, I'd like to share with you now Ipsos RISE. This is an AI-based insight platform used by some of the largest companies in the world for their risk and reputation management. And it's a single platform where you can merge inputs from news, from social media, from government regulators and survey data.Let's just roll the video.[Presentation]
And that's just one of a number of AI-powered solutions that we will be launching over the next few months as we develop our own in-house platform Ipsos [ Facto ] and then apply generative AI to many of our services. Another development that it's worth just updating you on is our work in ESG. We can see strong growth in that area. One example, for example, in the beauty industry, where we're working for a consortium of 71 of the world's largest beauty companies, helping them understand how consumers make judgments about the ESG credentials of different beauty products. The criteria that they're using and how different ones compare. It helps us, of course, develop this, an already strong position in the beauty sector. And again, it's widening the number of companies in this space that we're working with. But ESG in general is part of our DNA. We're one of the first research companies, I think the first, research company in the world to sign the UN Global Compact on Sustainable Development over, I think, 15 years ago. And there will again be more opportunities for us in this as we make our own journey, of course, in reducing our carbon footprint.Another nice thing this quarter has been, being named the most innovative research company in the world by the clients, of themselves, in the annual GRIT report. This is, I think, the fourth or fifth time that we've been nominated. And again, it's very pleasing that we're chosen by the clients themselves because of the different things that they can see us doing the constant innovation that our teams are bringing to the market.And we've also been talk -- we've obviously talked on many of these calls about acquisitions. We obviously have a plan to increase the number of acquisitions, and we have done that so far this year with many more, nothing absolutely game-changing so far. But all of these are helpful. The addition of behavior and attitudes in Ireland this week makes us the #1 player in Ireland. And there are a few more deals that we would expect to see closing this year, which again will follow our strategy of investing in public affairs, in health care and then perhaps filling in, in some of the markets. And we have some really interesting discussions with some larger targets in the United States and elsewhere, but again, would be substantial. So we're pleased to see the progress that we're making in this space and there will be more to come. And that's it.So as we announced in September, we are on track for organic growth this year of between 3% to 4%. The operating margin is confirmed at around 13%. And very happy now, of course, to take any questions that you may or may not have. Thank you.
[Operator Instructions] We'll take our first question from Emmanuel Matot from ODDO.
So 3 questions for me. First, do you think that artificial intelligence technologies can help some of your customers to do more market research internally?
Yes.
[indiscernible] segment.
Okay. Yes. Okay. Do you want to do the second one, [indiscernible]. We'll go through them one by one by one. Okay. What's the next one?
So maybe for Dan, the next one. What was the impact of ForEx in your Q3 sales growth? And have you seen any impact on your operating margin from the very negative ForEx in Q3?
Yes. Okay.
And the last one, can we have an idea of your organic growth for your order book at the end of September, it was at plus 2.6% end of June, if I remember well.
Okay. So on generative AI, I think, of course, like the arrival of the Internet and DIY tools, it's another opportunity for clients to try and do things themselves if they want to. What I would say is that we are expecting that specialized applications of the sort that we're developing will still be incredibly important. And what we found, of course, you may remember with Ipsos Digital, when we launched that as a Software as a Service a few years ago is that the vast majority of the users of that platform, which is a DIY platform, actually want to do research with an expert alongside them. And to be honest, we're expecting -- so yes, there are some businesses, certain clients, who will continue to want to try and use DIY solutions. But at the same time, AI gives us more interpretive power. And we will be -- we have the size to invest and we are investing in specialized prompts, libraries of prompts et cetera, that our clients want to use. I mean some of them, of course, are asking already can they use our internal tools. So I don't think it's a game changer in that sense. It may well turn out; as previous developments in the industry have been. If you think about the switch from face-to-face to telephone interviewing, from telephone interviewing to online interviewing to be potentially deflationary, but all -- but the industry grew through all those things because the number of surveys were simply expanding, people were able to do more for less. And I think that may well be a feature. But it's very early days. It's incredibly exciting technology. We've got thousands of people using it across Ipsos every day. And at the moment, I would see it as much as a -- if anything, more of an opportunity than a threat. On ForEx, Dan has probably worked out the numbers. Okay.
Yes. So on ForEx, we have an effect this year of minus 6.7%, so a very strong effect on the third quarter, definitely, which is linked to the fact that, as you know, euro appreciated against a lot of currencies in which -- in countries in which Ipsos is present, probably less actually against the sterling pound. But apart from that, a lot of foreign exchange effect. The impact on operating margin is not so important because as you know, the cost we have most of the time is in the local currency. So the impact on the operating margin as a share of turnover isn't very important. It could have a small impact on the level of operating margin at the end of the day, but not as important, obviously, as on the top line. In terms of your question, Emmanuel, on the order book, what I can say is that the order book at the end of September is in line with our guidance, 3% to 4%. We expect Q4 to be accelerating. This is clearly what we always said during the course of the year. We see this acceleration in growth in Q3. And we expect, obviously, an acceleration in Q4, mainly driven by, first of all, a favorable base effect in Q4 because as you remember, Q4 last year was a bit more difficult. And also the good momentum we have in many sectors, in particular health care, many sectors, except TMT, as I said, which is impacted by the big tech clients.
We're also seeing good orders for 2024, which is encouraging, even though it's only a minority of course, a small -- relatively small part of the visible revenue at the moment, but it's encouraging.
[Operator Instructions] We'll take our next question from Conor O'Shea from Kepler Cheuvreux.
Three questions from my side as well. Just to go back on the guidance. Obviously, that implies high single-digit, almost double-digit growth in Q4 at the top of that, and the range is, you still think that, that's realistic in the current environment?
Yes.
Then second question, just on your client base. Obviously, big tech, tech generally, everybody is still feeling that those adjustments are going through. But I think generally, the numbers are a little bit better at the moment. So are you more optimistic about next year on that? And also maybe you could say something on CPG, whether that you've seen any slowing in that level of activity in Q3? And then final question, just looking into 2024, it's a strong year in terms of election cycles in a number of countries U.K., U.S., and so on. How does your public sector business usually react in those type of cycles.
Okay. I mean I think in terms of, obviously, growth in Q4 needs to be in the high single digits as you identify in order to hit the targets, but we're confident in our -- all of our modeling and all of the numbers that we can see that we're on track for the 3% to 4%. So we're comfortable about that. And remember, the comparative just gets much, much easier now in Q4. So that's -- on that one, I think it's fine. CPG and tech, they are both, in many ways, disrupted. And that is -- that means that they're constantly looking for opportunities. Is big tech going to go back to the effervescent enthusiasm that it had during the lockdown and then the period after the lockdown when e-commerce dramatically accelerated? Probably not. But these are businesses that are huge. They control much of the world's digital advertising, and they need research, particularly when they themselves are being disrupted in their business models in some cases by generative AI. So I think we're cautiously optimistic, I would say. Is there going to be a new surge, I doubt it, but it's much more regular growth and regular business, I would say.And on the election cycle, remember those elections are very small and politics is a very small part of our work. In government, it does provide in some countries, where there's a lot of spending on elections, like the United States, some extra revenue. But it's fair to say that's in other markets, you often see a pause, while if a new -- if a government changes, there will be a pause while everybody works out their seats and what the policies are before they set off again. So it's -- I think it's sort of probably net neutral, I would say. In general, the government space is one that where we can see consistent growth. We've made some interesting new acquisitions in this space. I have more to come. And I was just been spending -- I've been to Washington, D.C. a couple of times this year. There are major opportunities for us that -- in the United States, for example.
[Operator Instructions] There are no further questions, so I will hand you back to your host to conclude this conference.
Thank you very much. As ever get in touch with Dan or me if you have any questions, I'm happy to talk to anybody in more detail. Thank you.
Thank you.