Interpublic Earnings: Lower Spending by Technology Clients Pressures Revenue; Recovery Likely in Second Half

We are maintaining our $36 fair value estimate for Interpublic IPG. The narrow-moat firm’s second-quarter results displayed some strengthening of ad spending in most sectors, which we think is likely to continue in the second half. However, lower spending by clients in technology and telecom pulled back revenue organically in the second quarter. While we expect the weakness in those sectors to continue in the second half, mainly due to cost-control initiatives, it should be offset by further growth in most other sectors. In addition, with the increasing adoption of artificial intelligence, we expect IPG and its peers to provide more consulting and data services, which will further drive growth. Revenue from recent account wins such as Pfizer will also help IPG to return to organic growth in the second half. Given the firm’s weak first half, management reduced its full-year organic growth outlook but maintained its margin guidance. Although the stock is down 11% in midday trading, it remains fairly valued, in our opinion. We continue to view peer WPP as a more attractive investment.

Net revenue came in at $2.3 billion, down 2% from last year as the organic decline (down 1.7%) and continuing currency headwinds (down 1%) more than offset the contribution from acquisitions (0.7%). Lower spending by technology and telecom clients had a 3.5% negative impact on net revenue, mainly in the media, data, and engagements (down 1.5%) and integrated advertising and creativity-led solutions (down 3.8%) segments. Specialized communications and experiential solutions net revenue increased 3.7%, driven by higher spending on public relations.