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Interpublic records Q4'17 top-line gain behind improved client spending

Backed by account wins and increased client spending, Interpublic Group of Cos. Inc. scored a revenue advance in the fourth quarter of 2017, reversing a top-line retreat in the third quarter.

Interpublic Chairman and CEO Michael Roth told analysts on the company's Feb. 14 earnings call that the agency holding company saw "a return to some spending" during the last quarter of 2017. "This is certainly a better feel out there with respect to the environment," he said.

While "the caution we saw much of last year will not lift overnight, we expect to gradually put the slower revenue growth of 2017 behind us and post improved growth this year," he added, noting that the company is targeting 2% to 3% organic growth for 2018 and an increase of 20 basis points to its operating margin.

The optimism is rooted in part by an expanding client base. Spotify, Ubisoft, Accenture, Coach, Carlsberg, LEGO, Eurosport, ETRADE and Wholefoods were among the client wins mentioned on the call.

Roth said Interpublic was net new business positive for 2017 and has a bit of a tailwind going into 2018. He said "the order of magnitude may be 20 to 30 basis points, but probably closer to 20 basis points. But I did indicate that in the first quarter we're still going to be cycling through [some] losses, so we'll see the positive results of that after the first quarter."

Although some companies will deploy tax reform-related gains against their marketing plans, Roth doesn't necessarily believe that client ad spending will increase owing solely to their enhanced cash positions from the recently enacted U.S. legislation.

"As business becomes a little stronger, I think companies will be more aggressive in terms of gaining market share in markets," he said. "And there, you have to spend on marketing dollars to do that. So I think that's the way it's going to flow through. I don't think it's just saying, 'Here's a chunk of cash, and we're going to put it into marketing dollars.' But we certainly got a lot of projects out there that when they're ready to spend, we can prove that what we do works."

After accounting for a normalized effect tax rate of 36.1% and a normalized cash tax rate of 29% on pretax income, Interpublic said U.S. tax reform will result in a normalized consolidated effective tax rate for the full year of 28% and a normalized cash tax rate of 24%. CFO Frank Mergenthaler said the company benefited from the net impact of U.S. tax reform by $36.0 million, or 9 cents per share.

Breaking down revenue by geography, organic revenue improved by 3.7% in the U.S. and 2.9% internationally. Excluding the impact of higher pass-through revenues, the organic revenue increase would have been 2.5% both domestically and internationally.

Operating income in the fourth quarter of 2017 improved 6.7% to $518.3 million from $485.7 million, with operating margin at 22.1%, versus 21.4% in the fourth quarter of 2016.

Pass-through revenues are offset dollar-for-dollar in operating expenses. As a result, changes in pass-through revenues do not change operating profit.

Fourth-quarter net income available to IPG common stockholders was $316.6 million, or 81 cents per share, compared with net income of $317.6 million, or 78 cents per share, in the corresponding year-earlier period.

The S&P Capital IQ consensus EPS estimate for the fourth quarter was 77 cents on both normalized and GAAP basis.

Full-year revenue edged up to $7.88 billion from $7.85 billion in 2016. Organic revenue improved 1.8% with a 2.2% increase in the U.S. and 1.2% internationally. Excluding the impact of the change in pass-through revenues, the organic revenue increase would have been 2.0% in the U.S. and 1.6% abroad.

Operating profit advanced 3.5% to $973.6 million in 2017, with operating margin improving to 12.4% from 12.0% in 2016.

Net income available to IPG common stockholders was $579.0 million in 2017, or $1.46 per diluted share, down from $608.5 million, or $1.49 per share, in 2016.

The S&P Capital IQ consensus EPS estimate for 2017 was $1.40 and $1.42 on normalized and GAAP basis, respectively.