Interpublic Group posted an organic revenue decline of 1.7% in Q2 2023 as pullbacks in the tech and telecom sectors and underperformance at its digital agencies weighed on growth, and as it faced tough tough comparables of 7.9% organic growth in Q2 of last year.
Operating margins also decreased year over year to 14.2% and were lower than the same quarter last year.
IPG's stock was down more than 12% upon reporting the results.
On the Friday earnings call, CEO Philippe Krakowsky told investors the sharp year over year decrease is primarily due to lighter spending in the tech and telecom sectors, as well as continued underperformance at its digital agencies, including Huge and R/GA.
He called the results “inconsistent with our expectations and our long-term track record of strong growth.”
In particular, reductions from tech clients, which make up 12% of revenue compared to 15% a year ago, “significantly impacted on our ability to grow in Q2, and for the first half of the year,” Krakowsky said. Retail also decreased against strong performance in previous years.
IPG’s Integrated Advertising and Creativity Led Solutions segment, which includes its creative agencies, was impacted by the pullback in tech and telecom, decreasing 3.8% organically year over year.
IPG called out slow growth at its digital agencies at the top of the year as a drag on growth in the first half. These agencies, already in turnaround mode, were particularly hit by declines from the tech and telecom clients as well as continued pressure to evolve their offerings.
R/GA recently snagged Intuit TurboTax’s AOR in the U.S., and was brought on by Mexican sports retailer Innovasport for digital commerce work. Huge won business transformation assignments from automotive services company Driven Brands in North America.
However, declines at these agencies weighed on gains in media, pushing IPG’s Media, Data and Engagement Solutions segment to decrease 1.5% organically in the quarter.
“Restoring those brands to consistent growth is proving slower than anticipated, due largely to continued challenges in the tech sector, as well as modestly heightened macro uncertainty,” Krakowsky said.
Together, these two tailwinds negatively impacted IPG’s growth across other segments by approximately 3.5% in the quarter.
Krakowsky said he believes tech in particular will “return to being a strong growth driver for us.”
“We’re talking about a relatively small group of large companies,” he added.
The U.S., which made up 66% of IPG’s revenue in the quarter, was particularly impacted by a pullback from domestic Big Tech clients, decreasing 2.5% organically in the quarter, against 8.3% growth in the same quarter a year ago.
International markets, which made up 34% of revenue in the quarter, decreased overall as well. The U.K. grew 1.7% organically, on top of 4.4% growth a year ago, led by Media, Public Relations, Creative and Experiential. Continental Europe decreased 4.3% organically, largely weighed down by lower client spend and a big client loss in Germany.
Asia-Pacific decreased 2.2% organically, with increases in India and China offset by decreases in Japan and other markets. Latam grew organically by 6.3%, while Canada, the Middle East and Africa grew 1.6% on top of 11% growth a year ago, driven by the Middle East.
Poor performance impacted headcount. According to CFO Ellen Johnson, severance costs rose 1.7% in the quarter as IPG took actions to “recalibrate the more traditional areas of the business where performance is lagging, as well as accelerate business transformation in our high-performing media vertical.”
Given the results, IPG downgraded its full-year organic growth outlook to between 1% and 2%, with 3% to 4% growth in the second half of the year.
“Our outlook at this point is not contingent on the recovery [of the tech sector] in the rate of revenue return we’re seeing in that space,” Krakowsky said.
Despite the disproportionate impact of tech and telco clients on the business, there were some bright spots in the quarter for IPG. Krakowsky said the group grew across eight client sectors including auto, financial services, food and beverage, healthcare and CPG.
Media and healthcare continue to show strength, though IPG Health was flat in the quarter. Winning Pfizer’s global creative, medical affairs and comms duties will be a boon in the second half.
Various client wins in the first half, including U.S. Media AOR for Constellation Brands at Initiative, global media AOR for Upfield at UM and U.S. media AOR at Mediabrands for Bristol Myers Squibb, will start to materialize in the second half.
“We came into the year with a net negative new business position, so that was a headwind, and that has shown up in the first and second quarter for us. By April, we shared we neutralized. Now we’ve turned it into a strong tailwind,” Krakowsky said.
IPG’s Specialized Communications & Experiential Solutions segment was also positive, growing 3.7% organically, on top of 11.1% growth a year ago, led by PR and experiential.
AI + Commerce
Krakowsky addressed IPG’s investment in AI as holding companies scramble to integrate the latest versions of the technology into their offerings.
While AI has played a large role in IPG’s data and performance media businesses for some time, it “will begin to have a powerful impact on our industry as a catalyst for creativity,” he said.
IPG has partnered with a “leading quantum-computing developer” to build software to solve complex data problems, as well as the typical slate of Big Tech companies leading in the space — Amazon, Microsoft, Google, Salesforce, Adobe and Nvidia.
“Given that every competitor will have access to these same kinds of tools, great creative ideas and executions will remain essential for brands to stand out and win in the marketplace,” Krakowsky said.
IPG also continues to bet on commerce. It launched Creative Commerce Labs in June to find new revenue streams for marketers by partnering with commerce providers, and just this week rolled out a unified retail media solution to help clients optimize spend across partners.
“We’re thinking about how we incorporate [AI] into everything about how we are going to market with clients,” Krakowsky said. “So I think we're going to be baking it into more and more of the tool sets that our folks have.”