IPG Q1: Revenues Down 10.8%; Wall Street Wants "Worst-Case" GM Scenario; Layoffs Still a Threat

Interpublic’s Q1 2009 results suggest that layoffs at its agencies — there have been about 3,000 so far — may not be over yet. The reason: IPG continues to hemorrhage cash.

The basics: Revenues declined 10.8 percent to $1.3 billion; the company reported a loss of $74 million.

Cash continues to pour out of Interpublic. The cashflow statement saw a loss of $466 million, due mainly to a loss of $557 million on its operating activities (i.e. the core of its business, as opposed to small gains on the finance and investing sides).

Interpublic’s cash management wasn’t all that great, either. In this environment, agencies should be trying to collect their billings from clients as soon as possible and delay payments to vendors for as long as possible, thus floating themselves on the resulting cashflow. In terms of collecting its bills, IPG did quite well: cash went up by $521 million. But the network lost $613 million on its accounts payable, leading to a net decline of $92 million (numbers are rounded).

IPG blamed the cash loss on the season. We’re nearing the upfront and the agencies have to buy a lot of media that they won’t get reimbursed for until later in the year:

Due to the seasonality of our business, we typically use cash in working capital in the first quarter and generate cash from working capital in the fourth quarter …The timing of media buying on behalf of our clients affects our working capital and operating cash flow.

But analyst Todd Morgan of Oppenheimer & Co. called CFO Frank Mergenthaler on that issue, in this exchange in yesterday’s conference call. He asked what portion of the decline was normal seasonal media buys and what portion was due to the recession. Mergenthaler replied:

… probably 60% of the move in the quarter was what we would have expected given how the normal working model works Q4 to Q1. So the other 40% is probably indicative of the environment in Q1.

More importantly for agency staff, the deterioration in IPG’s results indicate that the network may have to cut more jobs in order to make up for revenue declines. You can see that by comparing IPG’s revenue with its operating and compensation costs.

For every $1 IPG spends on agency staff salaries, it earns back $1.33 in revenue. That’s the lowest it’s been since Q1 2008, and down from a recent high of $1.79 in Q4 2007. Salaries as a percent of revenue actually went up in the quarter. Here’s what Roth said about jobs:

we’ve been making the hard, but necessary choices to successfully see the company through this period of uncertainty.

Worse, IPG makes a loss on the basic business it provides for clients. Once you add the operating expenses to the salaries, IPG gets only 94 cents in client revenue for every dollar it spends on staff and offices. Part of this is seasonal — IPG made a loss on its operating expenses this time last year as well, but made up for it in the other quarters.

You can see the problem in this breakout from IPG’s SEC filing: operating expenses exceeded revenue by $82 million.

Just to scare you further, Wall Street wants to know just how bad IPG’s General Motors problem could get. Here’s the conversation in the call:

Craig Huber – Barclays Capital: On General Motors, just given the concern up there among your investor base, worst-case scenario, … assuming the entire operations of General Motors shuts down, what would be the cash impact your company realizes …?

IPG CFO Frank Mergenthaler: We quantified on the Q4 call, an exposure of approximately $150 million and that’s comprised of receivables work in process, and committed media, we think that number is still a relatively good number.

Roth also mentioned that clients are reducing their fees, something that also happened at MDC Partners.

IPG CEO Michael Roth: When you do have a blanket fee reduction, it’s necessary for us to focus on the efficiencies. So if you end up in a situation where you are providing the same amount of work for less, we have to make sure that we are most efficient in delivering that type of work, and that’s what you see happening in this market.

And that’s why folks at Draftfcb, McCann et al should not be surprised to see more empty cubicles in their offices.

• See previous coverage of Interpublic:
  
• Interpublic Q4: Revenue Declines; Good News in the Details; Layoffs Still a Threat
• IPG Maximizes Pain of Layoffs Through Uncertainty
• IPG and Omnicom Downgraded by Deutsche Bank on Layoff News
• IPG to Cut Up to 2,000 Jobs; PHD Atlanta to Close
• InterPublic Loses Cash for Third Straight Quarter