Ipsos SA

PAR:IPS

Earnings Call Analysis

Slowdown Amid Global Challenges

Ipsos reported a total growth of 3.3% for the year, with organic growth at 2.4%. However, Q3 showed a stark slowing down of just 0.5% growth overall and a nearly flat organic growth of 0.1%. This slowdown is attributed to various global challenges, including political uncertainties in France, sluggish markets, especially in the USA, and mixed performances in Asia. While some regions like the Middle East and Latin America showed strong double-digit growth, it was the underperformance in the US that significantly influenced overall results.

U.S. Market Dynamics

The United States, contributing a major portion of revenue, is experiencing an uneven performance. Advertising and innovation sectors are performing well, but public affairs and healthcare services are declining. A new management team was implemented in the summer to refocus efforts, but recovery in the U.S. market is not anticipated until 2025 as significant changes take time to manifest. The new leadership is expected to guide the business positively moving forward.

Regional Performance Insights

In the EMEA region, Ipsos exhibited a solid 4.9% organic growth in Q3 and 6.7% over nine months, driven by robust performances in countries like Germany and Italy. Conversely, the UK and France showed noticeable slowdowns due to political uncertainty. In Asia, overall growth is just over 3%, hindered by a sluggish Chinese economic climate and shifts in other countries such as India.

Sector Analysis: Resilience & Innovation

Consumer Packaged Goods (CPG) clients showed resilient growth of 7% over nine months, largely due to their ability to pass on price increases during inflationary periods. Similarly, segments like technology and telecom are also growing by 5% as they adapt to generative AI developments. Ipsos.Digital, the company’s DIY platform, is a standout performer, achieving a remarkable 32% organic growth, showcasing its potential to improve profitability.

Operating Margin and Cost Management

Despite lower growth rates, Ipsos is maintaining its operating margin around 13% through careful cost management and improved gross margin. The continuous digitization and automation initiatives, along with broad employee training on generative AI, are expected to boost productivity. Management remains confident in sustaining margins and expects them to further improve as the company continues to integrate innovative technologies.

Acquisitions and Future Outlook

Ipsos has been actively pursuing acquisitions, recently launching a voluntary takeover bid for Infas, a leading firm in Germany’s public sector research, further solidifying its market presence. This year, acquisitions have added approximately EUR 60 million to revenues, with ongoing conversations hinting at future deals. Despite the current challenging economic landscape, the company emphasizes its long-term growth potential, backed by supportive shareholders like the Lac1 fund targeting 5% to 10% of Ipsos' capital.

Earnings Call Transcript 2024-Q3

[Ben Page, executive]

Good morning, everybody. Welcome to Ipsos' Q3 results presentation. We are going to take you through what we've seen overall this year and also in Q3 and discuss a little bit more about the situation. I'm joined, of course, by my colleague Dan Levy from Ipsos.

Could somebody turn on the screens in the studio, please? Thank you.

So let's look at the numbers to start with. Overall, at this point in the year, we have a total growth at Ipsos of 3.3% growth. Of that, 2.4% is organic, with a scope effect from our acquisitions of 2.8% and a negative FX effect, taking us to where we are. But of course, in Q3, as we announced recently, growth has slowed down at 0.5%. Organically, it's pretty much flat, 0.1%, again, with the scope effect and a negative FX effect. So a definite slowdown in activity, which we can now talk about.

Let's have a look at what we can see around the world. So first of all, I think in France, where I'm sitting today, we have a lot of political uncertainty and a clear slowdown in our French business. It's around 5% of our revenue, but it is significant.

In the U.K., the new government is still deciding what to do. There is a budget there in 6 days time that will set some clarity. And of course, in some Asian countries, we've also seen a slowdown. And that is compounded in a sense by the continued mixed performance in the United States. And there, we can see strong growth in our advertising business, in our innovation business, but we also have some significant and major parts of that business that are underperforming, where we are making changes.

Overall, in the United States, we have a new management team now in place over the summer and we are making significant changes inside that business. But it will take time, of course, for that to feed through.

The challenge, of course, is that the world is volatile and uncertain. And across the world, we can see good performance, interestingly, in some other Continental European countries like Germany and Italy. The Middle East and LatAm are actually showing double-digit growth.

We have resilient demand from CPG, which is important, a major part of our overall customer base. And our Ipsos.Digital solution is growing strongly as planned.

And actually, outside the United States, in the first 9 months of the year, we've seen growth at 5.6%. It's just showing the heavyweight of the United States inside Ipsos' numbers. So a mixed picture, but also, of course, some signs of slowdown.

I'll hand over to Dan now, who will take you through some more of the details.

[Dan Levy, executive]

Thank you very much, Ben. So let's start with the revenue breakdown by region, and Ben has already spoken a little bit about that.

The activity in the EMEA region is still strong with a 4.9% organic growth in Q3 and 6.7% over 9 months. The Middle East records double-digit growth, and we have also very good growth in several countries from Continental Europe and particularly Germany and Italy. And conversely, as Ben said, we do see some slowdown in the U.K. and in France, and, in France, particularly on the back of the political uncertainty.

In the Americas, the Latin America business is still growing very well, but our performance is penalized particularly by the situation in the U.S. As Ben said, the situation in the U.S. is quite uneven. So we have good growth on some service lines, particularly innovations but also creative excellence, which are performing well. And this is penalized more by the specific situation in public affairs and healthcare, which are declining. We have, as you know, appointed a new country manager in the U.S. in May, and we expect the situation to improve during the course of 2025.

And finally, in Asia Pacific, we are growing by a bit more than 3% over 9 months. The Chinese situation -- the Chinese economic climate is still sluggish, so there is not a lot to expect in the short term from China. And we have seen also some slowdown in the rest of the region, particularly in countries like India, who used to grow by nearly 20% at the beginning of the year, but where we see some delays and some wait-and-see attitude, particularly by large international clients.

Turning now to the performance by audience. The consumers activity are driving the group growth, 6% organic growth over 9 months. And this is, again, coming from innovation, customer experience and advertising. The citizens, doctors and patients audiences are shrinking, and this is particularly linked to the specific situation in the U.S. that I described before on the pharma sector and on public affairs.

By sector now. Good growth -- very resilient growth actually on the CPG client, plus 7% over 9 months. I think, again, this is coming from the fact that these clients have been able to increase their prices during the inflation period. And it's probably also driven by the fact that consumer behaviors are changing a lot in this very moving world, and that drives innovation for new products and that drives ultimately demand from market research.

Technology, media and telecom is growing well, plus 5% over 9 months. This is mainly driven by the Big Tech clients' demand. As you remember, we had a very strong growth in 2022 on these Big Tech clients. Then we have a correction in 2023. And we are now back to mid-single-digit organic growth in 2024, mainly on product development linked to generative AI development.

And I will not be commenting pharma and public sector that I commented in the previous slides.

Very good performance of Ipsos.Digital, our DIY platform, which is currently growing at 32% organically. Ipsos.Digital, as you remember, is typically twice the profitability of the group. And it is actually the very good success of Ipsos.Digital which is partly explaining the fact that we are increasing our gross margin in 2024, which enables us to confirm our guidance on the operating margin.

We are also pursuing our investments in acquisition. And we have launched, as you know, a voluntary takeover bid for infas. Infas is the leader in Germany on public sector research. It's 300-plus employees and EUR 50 million revenue. And we have purchased so far nearly 90% of the share of infas, and so we expect to finish this deal within the next few weeks.

And finally, as you know, the Lac1 fund managed by Bpifrance became a major long-term shareholder for Ipsos, which I think demonstrates the confidence in Ipsos' long-term growth potential. Lac1 is targeting to hold between 5% and 10% of Ipsos' capital.

Thank you for your attention. And now, over to Ben for more business updates.

[Ben Page, executive]

Thank you very much, Dan. So I just wanted to share with you the real-world impact that Ipsos has for many of our clients in some examples now. Because, of course, our whole job and the unique thing about the company is, of course, our global footprint, but also now our unique position in the market in terms of the range and diversity of services that we're providing to our clients.

It's a very complex global context. We've recently released our latest global trends report. There's a link on this slide, if you'd like to have a look at it. But it's a reminder of just the volatility of the world that we're now in, and whether it's the environment, politics which is -- throws up new surprises virtually every day, whether they're geopolitical or indeed locally, the changes that we're now seeing in our societies, both with migration, but also, of course, the declining birth rates, which are going to become more and more of an issue right across the West, and then, of course, the impact of technologies like generative AI and how people as individuals and just individual consumers are reacting to that.

We can see, for example, the rise of a trend we call nouveau nihilism, if you have a look at our report, the younger people who have just given up trying to get on because the cost of housing is so difficult, the chances of getting a good pension are too challenging. So a lot of things that our clients are facing and we're helping them navigate.

Some real-world examples of work that we're currently doing. For the Renault Group, we're looking at behavioral change around mobility. And this is helping Renault to power up its individual brands, so Renault, Dacia, Alpine, and Mobilize, really digging in deep into where people are on the migration to electrification of car use and how they're making choices over engine type, et cetera, their frequency of use, and indeed attitudes to car ownership. So pretty fundamental in terms of understanding the market.

Over in the United States, where we have a very exciting election, which, of course, is producing huge uncertainty. It's currently pretty much a toss-up. Although if you ask my personal opinion, Donald Trump is likely to win at the moment. But still some time to go. But of course, the challenge the United States has at the macro level is becoming a multiracial democracy that is at ease with itself. Many of America's biggest challenges are actually around becoming comfortable with itself rather than any external challenge.

So for Paramount, we're looking at how do you serve a very diverse population, what are these different groups in the population looking for, how do you make your advertising effective. And interestingly, we can see in our latest work, 6 out of 10 people in the U.S. saying that brands are actually losing authenticity when they're trying to look diverse and inclusive because it just looks so fake. So how do you do that in an authentic way?

Back here in France, during the Olympics this summer, we've been looking at how did people actually get there, how did that work out across France. 13,000 interviews during the Olympics from dawn till dusk in multiple languages, looking at all of the big games venues. Just again, an example of the diversity of the work that we're doing and helping SNCF do a brilliant job in terms of making the networks work, much better than in my country, the U.K.

And then finally, in Britain, for the BBC, the British Broadcasting Corporation, looking at how the BBC can responsibly use AI. Of course, the BBC is responsible for the majority of broadcast content in the United Kingdom, and looking there at exactly how do people react to the use of AI and the production of news and entertainment using AI. And that, of course, has shaped their editorial guidelines. As they say -- the chief technical adviser says it's fundamental in planning their future AI use. So across the economy, across the world, Ipsos is making a difference, and it's one of the things that motivates our 20,000 keen employees.

We've also just been named one of the world's most trustworthy companies by Newsweek and one of the best companies in the world by Time Magazine, which again is nice to see. And so overall, we can see some headwinds at the moment, but we're very positive about the overall direction.

And when it comes to the outlook, of course, as Dan has already said, of course, we can see a slowdown in growth. We have depreciated our expectations for Q4, which takes us to an organic growth for this year of around 1%. But we are protecting our operating margin by managing our costs carefully and also helped, of course, by the ongoing improvement in our gross margin. So our operating margin will be around 13%.

Acquisitions this year have added around EUR 60 million. And of course, we are in ongoing conversations about more.

And with that, I will stop and take your questions. So thank you.

[Operator]

[Operator Instructions] The first question is from Emmanuel Matot from ODDO.

[Emmanuel Matot, analyst]

Quick questions from me. First, which part of the sales decline in the U.S. in Q3 is related to difficult market condition and which part is related to the lack of management leadership according to you? What measures have been taken in response to the serious difficulties you are facing there?

Second, does the difficult situation in the U.S. call into question your acquisition plans in that country?

And third, do you feel confident about business perspectives with CPG customers in the short, medium term? It seems that the sales growth from that segment has slowed down in Q3.

[Ben Page, executive]

Okay. Well, why don't I take some of those, and then we can -- then we'll see where we come out. So in terms of the U.S., I would say it's difficult to be precise, but it's probably 50-50 in terms of internal versus external factors in terms of what happened in Q3.

And in terms of what we're doing about it, we have recently announced the appointment of some new senior leadership into our government business in the United States, so our PA business. We've got a further announcement that we'll be making in the next few days in terms of the leadership of that business. So that's a substantial part of the U.S., and we know that we will start to see some positive changes there.

I don't think it throws into question the possibility of further acquisitions in the U.S., because overall the U.S. market we can see -- if you look at the numbers, you can see continued growth in that market, often tech-enabled, but across it. And indeed, the government market in the U.S. looks pretty strong. And indeed, government spending in the U.S. continues.

CPG has been very resilient post the pandemic. And Dan has already referred to the sector's ability to increase prices in the first part of the recovery, which protected their profitability. They're now, of course, facing consumers who are still -- even as inflation falls, still very worried about the cost of living. And what that means is that they need to keep working very hard on innovation.

I mean it's very interesting when I spend time with our CPG clients, just how much work they're doing around the world in terms of trying to respond to smaller brands coming into their categories. Anybody can sort of almost start a brand with an Instagram account anywhere these days. So we expect that to be pretty resilient.

It's always innovative and it's always challenging in that sector. It's a very resilient sector, but also very innovative and trying -- wanting to try new things. But we think the solutions that we have there to help them with their advertising and to help them with their innovation, in particular. And we've just been -- one of the largest consumer goods group in the world has just made us their main innovation partner, for example. That means that we stay, I think, positive about that.

I don't know if you want to add anything, Dan.

[Dan Levy, executive]

I think it's fine. Yes.

[Ben Page, executive]

Yes.

[Operator]

The next question is from Gregoire Hermann, Berenberg.

[Grégoire Hermann, analyst]

The first one will be maybe on growth. I mean, if we look, obviously, the 9 months organic growth, it's quite decent on most regions and audiences. But if we look at Q3, we can clearly see a slowdown on all regions and all audiences.

So I'm just wondering how confident are you that next year you'll be able to somehow recover or change the dynamic here. I guess, regardless of macro, which is a bit tough to forecast, but you've pointed that you had managerial issues in certain places, and that we're just seeing a dynamic that is just declining. So yes, how confident are you for 2025 to change the dynamic here?

Maybe the second question would be on the margins. They hold up quite fairly. Can you be a bit more specific on what exactly you have been improving on despite the much lower growth? Are you confident that you can maintain this level?

And maybe just on M&A and potential return to shareholders, do you have a bit more visibility? I think you had a plan for a certain amount of spending by 2025. You have spent a little amount of money of that plan so far. Do you have more visibility? Do you also think about potential share buyback? Is there anything you can update us with at the moment, especially when we consider the current valuation of the firm?

[Ben Page, executive]

Okay. I think on growth, it's important to remember that while we are presenting data at sort of 3 or 4 regional level in this -- which is what we share in these calls. If you look at Latin America, for example, it's performing very, very strongly. The Middle East, North Africa, very, very strong. Outside France, so the U.K. in Europe, again, strong growth.

So the geographic footprint -- even with a macro slowdown, it's noticeable that quite a few companies have downgraded their revenue forecasts for 2024 at the moment. Even in that situation, we can see parts of the business that are growing strongly. And that gives us some confidence that if we can get things right, particularly in the United States, where we are obviously making quite a few changes, that we should see some decent growth.

On the margin what we're seeing is obviously ongoing digitization, but importantly now, the ongoing application of automation and the use of generative AI. The majority of our employees are now certified on the use of generative AI. It's something that we've been doing over the last few months. And that really does improve productivity. So I think those things together mean that we're pretty confident that we can protect our margin and continue to invest into the future.

On acquisitions and share buybacks, I'll hand over to Dan. We are having conversations of a completely different magnitude to the deals that we have announced so far.

Dan?

[Dan Levy, executive]

Yes. So maybe just to start with a word on the margin. So as Ben said, we have made some productivity gains on the back of more automated platform. And the investment we are doing on our platforms and also in the way we collect and manage the data particularly on the direct cost are bearing fruit. And that's what you can see both on the improvement of gross margin but also on the payroll.

And also beyond the payroll, I think the ability to maintain the operating profit is coming from the improvement of the gross margin, which partly comes also from a favorable business mix and particularly from Ipsos.Digital that I mentioned before, which is growing very nicely.

On the M&A, as you know, we have not reached the target that we set in 2022. But there is no point doing M&A for doing M&A. We are looking at small to midsized companies currently. And we do have the possibility to invest given our low leverage.

[Operator]

The next question is from Marie-Line Fort, Bernstein.

[Marie-Line Fort, analyst]

The first one is for the Citizen business. Could you share the geographic mix, U.S., Europe will be enough? And would you see potential for recovery in 2015 (sic) [ 2025 ] after 2014 (sic) [ 2024 ] with many elections?

And the second question is about your visibility. What visibility have you got on your order book today? And what is the last trend?

[Ben Page, executive]

So on the Citizens segment, I think the key -- the U.S. is a heavyweight in that business, a very, very heavyweight, much higher than Americas is in the business as a whole. And as a result, the underperformance in the United States explains most, but not all of that. I mean, we've also seen when governments change, which they have done recently in the U.K. and in France, both major countries in the Ipsos group -- together with the U.S., it is the majority of our government business. It is more than -- a large part of our government business.

What you tend to see is a slowdown, both because -- in the U.K., for example, where I come from, there is something called purdah, where all activity stops in the month before the election. You then have new ministers who need to learn about their jobs, their posts and their spending plans. And of course, in the U.K., those are all on ice while they work out what they're doing with the deficit. Because of that, there has been a slowdown in government spending in the U.K.

And over time, of course, the government -- I mean, Rachel Reeves is in the -- visiting the IMF to explain how we're going to borrow more money to spend on things, which should ultimately lead to the need for more research to understand how effectively those investments are playing out. But it will take some time into 2025.

And that's the same situation in Washington, D.C. with the U.S. government, where, again, state spending -- whoever wins the U.S. election. And Donald Trump has some fairly expansive ideas about various aspects of government spending. Potentially, it does take time because these are very chunky contracts, EUR 10 million plus. And those, of course, take time to be allocated and then to start to play through in the accounts. So again, it will be later in '25 that you would expect to see the Citizens segment really pick up, to be honest.

But overall, in terms of visibility, very roughly we can -- there are some of our businesses where we can see we have 80% of the revenue visible at the end of the first quarter. But in general, we have about only 30% or so of our revenue visible at the end of January for the year. And you're roughly running very crudely at around 3 months visibility on the total envelope.

So that's how it's looking at the moment. It is slower, but I think we can see very clearly through that to the underlying structural growth.

[Operator]

[Operator Instructions] I turn the conference back to the management. There are no more questions from the conference call.

[Ben Page, executive]

Well, thank you, everybody. And we will see you again in February for our annual results. Thank you.

[Dan Levy, executive]

Thank you. Bye-bye.