IPG underperforms peers again in Q3: ‘Results did not measure up to expectations’

IPG reported its second consecutive quarter of organic decline in Q3, down 0.4% year-on-year (YoY). 

The holding company said underperformance was due to a continuation of two macro-trends that have been impacting its business throughout the year: Decreased spending from tech and telecom clients and underperformance at its digital specialist agencies R/GA and Huge. These trends weighed on growth by 3.2% in Q3. 

On Friday’s earnings call, CEO Philippe Krakowsky also said the healthcare sector did not grow as robustly as anticipated, and that while media continues to perform well, there are some structural changes needed to deliver efficiencies for clients. He also said some new business wins are taking longer to ramp up than anticipated.

“The same factors that we’ve discussed as having impacted the first half of the year continued to weigh on Q3,” Krakowsky said. 

The U.S., which makes up 65% of IPG’s business, decreased organically by 1.2%, against 4.4% growth in Q3 of last year. IPG has been particularly hit by the tech and telecom declines in its largest domestic market, and Krakowsky alluded to McCann’s loss of the long-held Verizon account to Ogilvy, which could drag underperformance in the sector into 2024. 

According to Krakowsky, tech and telecom clients reduced spending “in the high-teens percent.”

Performance was better in Europe. The UK, which accounts for 8% of revenue, grew 2.2% organically compared to 4.9% a year ago, led by Mediabrands, McCann and FCB. Continental Europe, also 8% of the business, grew 3.9% organically, led by Spain and Germany. 

Meanwhile, APAC, 8% of net revenue in the quarter, decreased organically by 5% due to slowdowns in Japan and China. And LATAM grew 5.7% on top of nearly 20% growth last year, while “other markets,” including the Middle East, Canada and Africa, grew 1.2% organically on top of 10.6% growth last year.

Krakowsky noted that pressure on clients due to economic uncertainty has 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,” he said. He also directly addressed the war in Israel at the top of the earnings call, noting that it will likely lead to more uncertainty among clients. 

Due to the results, IPG has pegged its organic growth forecast for Q4 at 1% YoY, and will likely miss the 1% to 2% range it forecasted for the full year in Q2. Krakowsky acknowledged the results were “not up to the standards we’ve set over many years.” 

“We’ll therefore be looking to close this year as strongly as possible and, specific to identified areas of underperformance, assessing structural solutions to improve our growth profile,” he said. 

CFO Ellen Johnson also pointed to a headcount reduction of 1.5% YoY, as she reiterated that IPG has been “very disciplined about not hiring ahead of revenue” to protect its margins. IPG is still on track to deliver its margin goal of 16.7% for 2023.

There are some signs of potential improvement. IPG’s top 20 clients grew in aggregate in the quarter, and the group saw “progressively better performance from month to month during Q3, with growth in September,” Krakowsky said. Six of eight client sectors grew in Q3, led by auto and transportation, industrials and public sector and food and beverage. And the holding company was net new business positive in the quarter.

“We continue to anticipate that the new business that we have won across the first part of this year will be more visible in our results going forward,” he said, pointing to UM’s global win of General Mills, announced on Thursday. 

Creative and digital under pressure

IPG said its Integrated Advertising and Creativity Led Solutions segment, which includes its creative agencies, decreased 4.1% organically, as many of its agencies continued to be impacted by the pullback from tech and telecom clients. 

But there are broader macro-challenges at play. Johnson attributed the decrease at creative agencies to “a more challenging macro environment that was felt broadly across our more traditional, consumer-facing agencies.”

IPG also noted that FCB performed strongly in large part due to its “strategy of incorporating data-informed, audience-led thinking into its core creative offering.” 

“We need to look at, 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 with us and to have a flying formation for that grouping?” Krakowsky explained. “That’s a part of the business that everyone is thinking about ways to integrate that. When you take creativity and it's part of an integrated offering, it's definitely more powerful.” 

As for its digital agencies that continue to underperform, Krakowsky alluded to structural similar changes to come.  

“We clearly have to ramp up the urgency on this front and be open to a broader range of solutions,” he said. “It's all in service of making it simpler for clients to engage with us. 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.” 

Meanwhile, IPG's media offerings continued to grow, with media, data and engagement solutions up organically by 50 basis points in the quarter. Krakowsky acknowledged the company’s big bet made on the acquisition of Acxiom in 2018 isn’t yet paying off as handsomely as Publicis’ purchases of Sapient and Epsilon, which are driving its outperformance this year. 

He also noted IPG’s merger of Kinesso, Matterkind and Reprise in September is a response to some of these pressures, and alluded to investment in growth products such as a unified retail media solution, a retail ID cloud and various AI tools, led by an internal AI steering committee. 

“AI is an investment priority,” he said. “There is so much demand for content right now given how many channels there are and how complex the consumer journey is across this incredibly fragmented tech ecosystem, that we also see opportunities for it to be a revenue generator.”

He also acknowledged that in media, “it could very well be that we are missing out on an additional source of growth there,” alluding to the principal-based trading models employed by its competitors, which can drive efficiencies but also conflicts of interest for media buyers. 

“We clearly have to be open to exploring every avenue for delivering value to our clients, and that includes our trading model,” he continued. “Clients value products and results; we’re strong in that regard. They also value efficiency, and we have to deliver on both fronts. We’re looking very hard at our model within the media component for that reason. There is no upside in leaving growth on the table.”