Q2 2022 Omnicom Group Inc Earnings Call
Welcome to the Omnicom second quarter 2022 earnings release Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session to participate. Please press one day zero and if you need assistance during the call. Please press Star then zero.
As a reminder, this conference call is being recorded.
At this time I would like to introduce you to your host for today's conference Senior Vice President of Investor Relations Gregory Lundberg. Please go ahead.
Thank you for joining our second quarter 2022 earnings call with me today are John Wren, Chairman and Chief Executive Officer, and Phil Angela Ostrow Executive Vice President and Chief Financial Officer on our website Omnicom group Dotcom, we posted a press release along with the presentation covering the information we will review today as well.
A webcast of this call.
An archived version will be available on today's call concludes before we start today I'd like to remind everyone to read the forward looking statements non-GAAP financial and other information that we have included at the end of our Investor presentation.
Certain of the statements made today may constitute forward looking statements and these statements are our present expectations.
Factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2021 Form 10-K.
During the course of today's call. We will also discuss certain non-GAAP measures you can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials.
We will begin the call with an overview of our business from John and then still will review our financial results for the quarter.
After our prepared remarks, we will open up the line for your questions I'll now hand, the call to John .
Thank you Greg Good afternoon, everyone and thank you for joining US today, we're pleased to share our second quarter results are.
Our second quarter performance was very strong we exceeded our expectations with organic growth of 11.3%, which was broad based across our agencies disciplines regions and client sectors.
Operating profit margin for the quarter was 15, 2%.
70 basis points higher than our comparable margin in 2021.
Our agency management teams continue to grow their topline while closely managing costs in line with revenue.
Earnings per share for the quarter was $1 68 up 15.1% versus the comparable amount in 2021.
Finally, our cash flow liquidity and balance sheet remained very strong and we continue to support our primary uses of cash.
Dividends acquisitions and share repurchases.
Phil will cover our results in more detail during his remarks.
During the quarter, we continue to focus on evolving our existing capabilities to meet the needs of our clients and prospects.
Most notably we expanded and strengthened our ecommerce and retail media capabilities.
At the Cannes Lions Festival of creativity in June .
We announced a number a first of its kind e-commerce collaborations with Amazon instant card Kroger and Walmart.
We now have more than 1500 certified experts, helping our clients navigate the complexity of executing media and driving sales on retail media platforms.
The commerce partnerships, we recently announced will provide us with additional access to online and in store transactions and audiences.
So we can deliver more precise actionable consumer insights more effective creative ideas and content and more targeted media for our clients.
We are delivering these services by leveraging the power of our omni platform.
We have developed omni commerce, which integrates data about audiences shopper behavior media content shelf analytics sales and inventory.
On the e-commerce enables us to maximize brand awareness and increase the effectiveness of our clients retail media investments.
Driving product sales and profitability.
We're pleased to see our efforts in this critical area being recognized in a recent Forrester report, which noted that Omnicom media group leads across our peer set in retail and E Commerce media.
And its intelligent capabilities optimization and operations automation.
Going forward, we will continue to invest organically and through acquisitions and ecommerce and retail media.
As well as in our other growth areas, including performance media.
<unk> and precision marketing.
Digital transformation and Martech consulting and the health sector.
As we continue to expand the capabilities of omni we are maintaining our privacy first approach and how we aggregate and manage data on behalf of our clients and partners there.
To oversee these efforts, we recently appointed Brian Clayton as Omnicom's, Chief data privacy officer.
Brian has an extensive background in data privacy that incorporates data ethics governance and protection. He will be a key member of our team as we continue to protect the privacy and security of the data we manage.
Clients are rightfully demanding greater insight and control over their data has third party cookies come to an end and as increasingly complex data privacy laws and regulations emerge around the globe.
Our approach is to ensure that we have omnicom wide privacy practices frameworks and programs that safeguard the security of client data employee data and data we obtain from third party partners.
Continuing with some key leadership additions I am pleased to announce the appointment of Matt Mcnally.
Omnicom Health group.
He succeeds edgewise, who recently announced his retirement.
Kristina Hansen was named U S. CEO of OMD Chrissy I served as the networks Global Chief strategy Officer since 2018.
She succeeds John Osborn, who after more than 30 years with omnicom.
Stepping back to focus on his long standing work with nonprofit organizations.
In June we attended the Cannes Lions Omnicom agencies for more than 30 countries one over 120 lines.
Two of our creative networks, DDB and be BDO placed in the top five in the network of the year competition.
In media OMD won media network of the year, which was followed by a recent report from Forrester naming Omnicom media group.
Is it having the strongest current offering in the marketplace.
Congratulations to all of our agencies and people on their exceptional performance.
Do you know it continues to be a top priority for us and during the quarter, we issued our diversity equity and inclusion performance report.
I encourage our people and stakeholders to read the report on our website and know we are committed to keep building on our progress moving forward.
Overall, we are very pleased with our progress on our key strategic initiatives and our first half financial results.
Our notable new partnerships and continued investments in high growth areas position us extremely well to service our clients now and in the future.
While we remain confident in our strategies and execution, we are retaining a healthy level of caution due to the existing macro factors, including the ongoing war in Ukraine.
The effects of the pandemic across markets.
The continuing disruption of global supply change.
And the economic risks posed by higher inflation and rising interest rates.
Even with this backdrop, we are continuing to see strong demand for our services and based on our first half results are increasing our organic revenue growth forecast to between six and a half two 7% for the full year 2022.
We also continue to anticipate delivering the same strong operating margin of 15, 4% in 2022.
That we delivered in 2021.
Before I finish I'd like to address the ongoing challenges our people are facing around the globe.
The war in Ukraine continues to impact the lives of our colleagues and their families in the Ukraine.
And is having an effect on our people around the world.
We remain steadfast in supporting them for as long as needed.
In the U S. We continue to encounter mass shootings senseless acts of gun violence, and racially motivated hate crimes.
My heart goes out to the families of the victims of these crimes.
Finally, the Supreme Court's decision to overturn ROE V Wade.
What was the step back in the advancement of women's rights and is having a detrimental effect on many of our colleagues.
We're committed to ensuring our people have equal access to health services, no matter, where they live in the United States.
Our actions with respect to the Ukrainian War and the recent Supreme Court decisions.
Flex our commitment to always put the safety and well being of our colleagues first.
I will now turn the call over to Phil for a closer look at our financial results Phil.
Thanks, John .
As John said, our second quarter results were very solid organic.
Organic growth continued at a very high rate.
Driven by performance across all of our disciplines.
Our growth delivered healthy operating margins and good earnings per share performance.
We continued to return a significant portion of our free cash flow to our investors through dividends and additional share buybacks.
Let's go into the financial details of the quarter beginning on slide four.
This view of the reported income statement shows adjustments to make the second quarter of the prior year comparable.
As well as making the six months for both 2021 and 2022 comparable.
As we described last year for the second quarter 2021.
Operating expenses in the second quarter of last year benefited from a gain on the sale of a subsidiary.
Interest expense includes a charge in the second quarter of last year on the early extinguishment of debt.
And income tax expense in the second quarter of last year was also impacted by the early extinguishment of debt.
In addition, as we discussed last quarter for the year to date 2022 period.
Operating expenses included charges arising from the effects of the war in Ukraine in the first quarter of this year and.
Income taxes were also impacted by these charges.
As you can see at the bottom of the slide the net effects of these items resulted in strong EPS of $1 68 versus $1 46 from Q1 of 2021 as adjusted representing.
Representing EPS growth of 15, 1% in the second quarter.
For the six months EPS of $3 seven as adjusted.
<unk> grew 10%.
From $2.79 also as adjusted.
Our reported tax rate was 26, 5% this quarter the.
The same level, we expect for the remainder of the year.
Net interest expense for Q2 of $40 1 million.
<unk> declined by $6 8 million from $46 9 million in Q2 of 2021.
Excluding the charge from the early extinguishment of debt last year as previously discussed.
The decline was principally driven by an increase in interest income in Q2 of 2022.
Of approximately $4 million gain.
Given our principal debt is fixed rate, we expect net interest expense to decline in the second half compared to the prior year as interest income increases due to higher investing rates compared to 2021.
Lastly, our diluted share count was down almost 5% year over year in the second quarter due to our ongoing share repurchase activity.
Now, let's look at our results in more detail beginning with revenues on slide five.
Reported revenues were flat as another quarter of strong organic growth at 11, 3% was offset by the negative impact of foreign exchange rates and disposition revenue in excess of acquisition revenue.
Both of these impacts were expected as we saw the dollar continues to strengthen globally and as we pass the final two months of our divestiture.
Passionately media subsidiary last June which was included in our advertising and media discipline in the U S.
The year to date results closely mirrors, the second quarter.
If rates stay where they were as of July 15th we estimate that the impact of foreign exchange rates will reduce our revenue by approximately 6% in the third quarter.
By four 5% for the year.
Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue by approximately 1% in the third quarter Pri.
Primarily resulting from the disposition of our businesses in Russia.
And by approximately 4.5% for the full year.
Turning to slide six it's clear that our organic strength was broad based across all of our disciplines.
Advertising and media our largest category.
Posted 8% organic growth in the quarter.
The strong performance in both our media and our creative agencies.
Precision marketing continued its strong performance with 21% organic growth in the second quarter.
Commerce and brand consulting was up 11% led by our branding and design agencies.
Experiential had organic growth of 37%.
But it's worth noting that lockdowns in Q2 in China weighed on these otherwise good results.
As a reference in reported dollar terms for the first six months of 2022.
This discipline has reached approximately 80% of its pre pandemic revenue levels.
Execution and support was up 9% led by our merchandising and point of sale businesses.
PR was up a very strong 16%.
Selecting growth from both long standing and new clients and increased business activity across many sectors of the economy.
And health care, which is 10% of our revenues grew an impressive 9%.
Turning to slide seven we once again saw strong organic growth rates in every region.
With the exception of Asia Pacific, which was impacted by the Lockdowns in China as I just mentioned.
This was nicely offset by acceleration in the U S Europe and the UK.
In the U S, which is more than half of our revenues are 10.7% organic growth was primarily driven by growth in advertising and media.
Public relations precision marketing and health care.
Outside of the U S growth was led by Europe , which was primarily driven by advertising and media experiential and P. R.
Despite the headwinds and experiential and Asia. The region saw strong results in advertising and media brand consulting and health care.
Looking at revenue by industry sector on slide eight.
Relative to the second quarter of 2021 the.
Broad distribution of our clients remains relatively stable.
As a percentage of the total we did see an increase in technology.
Offset by reductions in both retail and travel and entertainment.
Two sectors that have both been impacted by the economy.
And by some lingering pandemic effects.
Let's now turn to slide nine and look at our operating expenses for the quarter.
In total our operating expenses were relatively flat.
As a good result, given the strong growth in our business tight labor markets in several regions and our continued investment in our strategic focus areas.
Salary and related service costs were 55% of revenue compared to 59% last year.
After adjusting 2021 for amounts related to acquisitions and dispositions.
Third party service costs were 21, 4% of revenue compared to 21% last year.
Also after adjusting for amounts related to acquisitions and dispositions with the increase reflecting growth in our businesses.
Occupancy and other costs, which are less directly linked to changes in revenue were flat year over year.
We will continue to manage our real estate footprint in alignment with how people are working in our offices post pandemic.
And it's also worth mentioning that our rent expense was down this quarter.
SG&A expenses were up seven 5% year over year following the increase in our business activity, including higher marketing and professional fees compared to last year.
Turning to slide 10, our second quarter operating profit was 541 6 million.
A four 6% increase from last year.
Our operating profit margin of 15, 2%.
On total revenues was well above the comparable amount for last year a.
14.5% has adjusted.
Please turn now to slide 11 for our cash flow performance.
As you know, we define free cash flow as net cash provided by operating activities.
Excluding changes in working capital, which are generally positive for us on an annual basis.
Free cash flow for the first six months of 2022 was $768 million down $28 million or three 5% from the first half of last year.
However, $48 million of the charges, we've recorded in the first quarter.
The effects of the war in Ukraine or cash related.
Absent this we were up a bit year over year.
Regarding our uses of cash we used 294 million of cash pay dividends to common shareholders.
And another 38 million for dividends to Noncontrolling interest shareholders.
Our capital expenditures of $43 million were at normal levels.
Acquisitions net of dispositions and other items were $289 million.
And lastly, our net stock repurchases during the first quarter were $393 million, including another $100 million in the second quarter.
As we said on our call in April .
For the full year 2022 we expect we will spend at our historical annual range of around 500 million to $600 million.
On slide 12 is an overview of our credit liquidity and debt maturities.
There are no changes in our outstanding debts are in the second quarter.
And our gross leverage at June 30th was two four times.
In addition to $3 3 billion of cash and short term investments.
We also have a $2 billion U S commercial paper program.
<unk> stopped by our $2 5 billion revolving credit facility.
I'll end my prepared remarks today on slide 13.
Which shows our strong return on invested capital of 24, 4% for the 12 months ended June 30th and.
And 41.9% return on equity.
These are very strong and very competitive returns and reflect omnicom's consistent operating performance and approach to capital allocation.
At this point operator.
Please open the lines up for questions and answers.
Thank you.
And if you would like to ask a question. Please press. One then zero on your Touchtone phone he may remove yourself from any temporary crushing one zero debt.
If you're using a speakerphone please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one zero.
We will go to the line of Steven Cahall with Wells Fargo. Please go ahead.
Thanks. So maybe first question you can just talk a little bit about how the business compares today to what it was like in previous cycles, a lot of change in the industry a lot of it has changed and the complexion of the company as you've bought and sold certain businesses. So maybe John with just wanted to get.
Is your take on how different the business is maybe to some of the last times, we were heading into a more volatile macroeconomic environment and then kind of follow up on that you gave the flattish margin guidance for the year on a really strong organic growth number I'm. What I'm wondering is let's just say that maybe next year. The growth is it going to be so good.
Because of the macro for the industry.
Does it also mean that the margins are pretty steady and we just kind of reached a point, where the margins are kind of steady through the cycle or should we expect margins to be down a bit if organic growth slows down but would just love to get your view on the margin. Thank you.
Okay.
<unk>.
This has probably been my money to see.
Fourth at.
At least for them, but we.
I haven't gotten through the recession yet.
I've been through three others and.
The way I'd characterize the portfolio today.
Is it is more fit for purpose than at any time in my career.
You're absolutely right in pointing out we spent a lot of time cleaning up the portfolio.
And then in the last 18 months have been adding to those areas, which are the highest growth.
And the way I referred to it is fit for purpose so I'm.
Please weird where do we stand the management changes that we've made.
And across the board.
There's always little things to do but there are a few things to get.
Correct.
Any other point in my career.
And so we're very pleased.
We are we continue to invest organically and things that we believe will add.
Add to our revenue.
Well next year and beyond and those investments are getting made as we speak.
And they are included already in the numbers.
That you see reflected in the reported here.
In terms of margins.
Way too early to predict.
What next year's margins are going to be.
But.
We have always endeavored.
Zinc.
Think of it as an example.
Well, we've had time to plan, where we've not been able to maintain margins.
Yeah.
And we endeavor always to improve them.
We're constantly looking at our major expenses, which are.
Matching staff to revenue.
Management throughout the company is very <unk>.
Very aware and very capable of doing that.
And the second thing is the expenses real estate, which improves every single year for us.
So yeah, just one clarifying point that you referred to margins in 2022 being flat when when you.
When you carve out the the second quarter.
Nonrecurring gain from.
The disposal of.
Our business, we had last year.
And you keep margins flat that represents.
Yeah somewhere around 30, 30, plus basis points of improvement year on year.
Like lifetime so.
Like John said, certainly we're always focused on.
Ways to be more efficient utilizing outsourcing and offshoring and automation.
Yeah, there's just an awful lot of uncertainties out there in the future, but we're always trying to be more efficient and then deliver that improvement prospectively.
Great. Thank you.
Sure.
Next we'll go to the line of Jason Bazinet with Citi. Please go ahead.
Well I I haven't lived here as many recessions you guys have but I've I've lived through three and let me at least on the sell side and let me just ask this question.
Good behavior on the buy side historically is a company Mrs. Another company message and then the buy side wakes up and says Hey, it's a recession.
This is the only time I can remember where the buy side is convinced that there's a recession when there isn't as much tangible evidence on the ground to the slowdown.
I guess, Mike My question for you is.
There's the buy sides pessimism seem reasonable to you.
Just on what you're hearing from your clients I guess, not this year, but potentially next year. Thanks.
Well, we just got back from the Cannes Festival, where I'd be occasion.
To be personally with quite a number of our largest clients.
And.
But I haven't countered garages.
Point of view, everybody is cautious because of the unknowns that are out there.
But most sophisticated marketers who have lived through past recessions.
No that if they cut back to dearly.
They lose sales as the recovery starts to happen.
So.
People are very cautious about.
Serious cut backs.
As long as there's no dramatic traumas in the marketplace.
So.
Yeah, well no more because every one of our re forecast.
And then certainly once we get into planning.
Towards the end of the year for next year is done from a bottoms up point of view.
Where we're speaking to individual offices managers people, who have day to day contact with clients and.
And we also get site on media spending and some commitments that they have to.
Extend into the coming months.
Yeah. So.
Help us.
Manage our organization so.
And I don't know anything about your business.
Understood. Okay. Thank you.
Sure. Thank you.
Next we'll go to line of Tim Nolan with Maguire Macquarie. Please go ahead.
I'll continue the line of thought on.
If and when we go into a recession, which seems to be everybody's a foregone conclusion, but again I think it's remarkable that there seems to be no sign at all in your numbers, thus far but my question is and prior recessionary.
Recessionary periods, we saw a very clear shift from.
Let's call it traditional media into digital media or brand advertising and the targeted marketing whatever that may be and I. Just wonder you know how are you thinking about if there's a slowdown of whatever magnitude going into next year. What happens like what is left to shift to digital if I could ask it that way and what areas within.
That might be of interest that could sort of hold the fort.
I mean, it's a connected TV you mentioned ecommerce several times on this call. If you can just enlighten us a bit more as to what the sort of resilient or or even possibly grocery areas might be thanks.
Sure.
Yeah.
Tim.
As we look out.
So there's going to be a couple of areas where.
Advertising is going to be absolutely necessary, especially as you get into things like the streaming wars.
But I anticipate it will be coming in next year.
Also as.
The subscription services have to become AD supported that will create opportunities for our clients.
And with the daughter and kept them capabilities to optimize client spending we should be able to take advantage of that to the benefit of the client proving that a dollar of invested get so two dollar return.
So.
Also when compared to prior.
Periods.
As I said mentioned just briefly.
A couple of minutes ago.
I truly think we have a more balanced and fit for purpose portfolio today.
Are there any other point in my career.
And we are able to pivot.
We're a great deal more agile.
And whether it's digital or whatever the requirement is.
And reaching the customer and we're terribly focused.
Precision marketing, which when you boil it down.
Is selling things.
And that's why we exist to attract clients to products and to move them off shelves or out of warehouses and so on.
I'm pleased I'm never 100% satisfied that's why we're always making investments.
And our reference to e-commerce.
It's very important not only in this year and next year.
But once you look at projections about where this marketplace is expected to go in the next couple of years.
We're making investments that will keep us fit for purpose as we move forward.
Uh huh.
I don't know if that covers it 10, but no.
Oh, that's great can I ask one quick follow on.
Burton.
Which is about a it's just probably just Nit picking out it might know the answer but looking at your revenue in Q2 and year to date. It looks like Asia Pac was the laggard in Q2 and it looks like it slowed meaningfully from Q1 I guess is this related to China Lockdowns or just if you could just let us know why that particular.
Even sticks out versus the rest yeah, I think China is the exception and we felt that probably most dearly and our execution in all businesses.
Whereas the shutdowns prevented us.
And preventing clients from <unk>.
Having tradeshows and other type of affairs, which are generally a part of our revenue.
So.
Shutdowns.
Do affect those execution.
Areas more than.
Almost any other area.
Got it thanks, a lot John .
Oh.
Next we'll go to line of David Karnofsky with J P. Morgan. Please go ahead.
Thanks for taking my question I'm wondering if you could speak to your performance through the quarter.
Outside of events with China, what you just spoke about were there any observed changes.
In client budgets and some of the headlines around macro worsened even at the margin and then John as it relates to areas like digital transformation or CRM, which have had really strong tailwind coming out of the pandemic would you expect client spend here to adjust down with a softening economy or is the investment that marketers are making right now a lot more structural than that.
I believe that the investment clients are making are structural and they will continue and.
We.
I haven't announced it we've already won business.
It doesn't really start until the first quarter of next year. So.
I have reason to believe my statement.
The first part of your question I'm, sorry, if you would.
Just about our performance during the quarter did you observe any changes in client budgets.
Some of the headlines around macro worsened, obviously, leaving aside the China event stuff that you just spoke about.
No other macro trends that I can point out.
There you know there are always puts and takes in terms of what clients are doing.
And.
And I'd say on balance.
Because of the portfolio.
And because of the agility that we threw out.
We're able to shift with the clients as that occurs.
Yeah.
We're not we're not as as.
You know focused on on a monthly number David I wouldn't say that we saw any trends in the end.
The other months of the second quarter.
That was unusual that would lead us to conclude anything different other than.
Yeah. It was it was a very good quarter on and.
And our expectations.
Haven't gone up as a result of it is as John had indicated earlier.
Great.
Thank you.
Mexico to line of Ben Swinburne with Morgan Stanley . Please go ahead.
Thanks, Good afternoon I have two questions first is on on the M&A environment, John you've talked about wanting to put more capital to work on the acquisition front. We've made some you made some this year but.
I'm wondering if just the change in in the market backdrop capital market backdrop has changed your appetite at all or maybe have seller multiples come in at all given private market valuations of I think of that started to follow public market valuations I'm not sure. What maybe have you have your areas of focus shifted at all and then I.
I had a follow up.
Sure.
Our area of focus hasn't changed at all.
Good.
I comment that the areas, we're most interested in.
Yeah in my prepared remarks, and I think that's fairly consistent with where we've been all year.
I do think that.
Although I'm waiting for it to come through.
Is that.
People client potential.
Potential targets are.
Our adjusting their expectations.
Albeit.
Not quick enough for us.
In terms of.
The cost of capital.
What that's going to do to the fantasy land.
[laughter] card for <unk>.
Yes, so if I go back 24 or 30 months.
We're coming back into more normal.
Fed increases rates.
And then other areas in the world to defend their currencies in markets.
Also increased rates.
That's going to make.
Deals more reasonable than they were.
This time last year.
Hmm.
Great and then I was just wondering if you guys could help us interpret the full year guidance, a little bit you've you've outperformed.
The first half relative to what you laid out back at the beginning of year outperformed quite a bit.
Rough numbers I think you're up 11, 5% in the first half guiding to six and a half to seven for the year. So that I think plugs out to like fairly low single digit growth in the second half.
Is that kind of continued conservatism pragmatism like we saw in the first half or is that you know is your visibility and reasonably solid so that's probably where.
We should expect you to because that's obviously a pretty significant deceleration from what a strong first half you've had.
Well.
You've known us for quite a while.
Again.
Back to my prepared remarks.
We remain cautious.
And you.
You know that we're cautious.
<unk>.
We.
Increase the guidance from in each of the past two quarters.
Modestly you could argue given where we offer six months.
And.
It is just simply being cautious.
We're not.
We're not ones to overextend ourselves.
And.
For those that have followed us for a long time, not because the third quarter, but.
In terms of the fourth quarter.
I for the last God knows how many years.
Always caution about the amount of project business it happens and at the end of the year.
<unk>.
I'll know better by the time, we get to October .
But.
We weren't going to project.
Yeah.
Does that that was going to come through at this point.
Because we we can't we prefer to be cautious and then over deliver if we can.
Right and that came through last year right in the fourth quarter.
Yes, oddly enough I mean, it's come in the last over two decades, I think it's come through in all but two years right.
Right right.
So.
But again.
Yeah that that becomes.
Now is there going to be.
He.
In Europe in the fourth quarter or not so.
Yeah, you know I think our expectations as it relates to.
Our experiential and execution businesses are probably.
Rightly cautious and more cautious than certainly the rest.
The portfolio as we as we head into the second half.
But overall I think yeah, we're cautious mainly because of the things that are outside of our control.
Sure.
Thanks, guys.
And thank you for getting that question out of the way.
Youre welcome.
Mexico the line of Benjamin Rosner with Moffett Nathan. Please go ahead.
Great. Thank you following up on a earlier question on margins.
As it relates to the recession as well so in prior economic downturns, you've been able to effectively manage margin given the variable cost nature of your business model.
But now you expect to have over 10000 engineers at the company this year.
Much more compared to less than 1000 engineers around five or so years ago. So my question is just having more engineers our technical talent does that meet your operating cost model more fixed and less variable than it was in prior economic downturns and in this context, how you're thinking about managing margins if there's a recession.
You.
Well.
A major component in the flexibility of our cost.
Our incentive pools.
Well, it's company by company.
So as said.
And Martin I mean incentives are.
Our earned based upon performance.
And that takes into consideration the full P&L of that operating unit.
So that more than any one item.
Helps us through this process in any short term period.
We've also expanded.
And even expanding our engineers.
We've expanded them on principally offshore.
And.
We're certainly not planning any cutbacks or at all.
Was it the engineers are.
All making significant contributions to our president business.
And what we anticipate we're going to require in the future.
No.
I don't I don't see it.
Changing the.
The change in mix of our employee base.
Is not detrimental to our ability to manage it.
Yeah.
Yeah.
Yeah.
And next we'll go to line of Dan Salmon with BMO capital markets. Please go ahead.
Alright, good afternoon, everyone. So a couple of follow ups on retail media and ecommerce services first I've I've, probably asked this before I'll probably ask it again, but are you tapping into trade promotion and vendor allowance budgets, yet and shifting them to your digital media spend.
And sort of related to that can you talk about retail media traction beyond the CPG vertical broadly.
And then second on ecommerce services I'd say, there's a bit of a debate among investors right now and whether we're seeing E. Commerce simply go through a lull right now as a broad reopening happens or whether the longterm opportunity really isn't as big as everyone's.
Pandemic peak expectations.
Are you seeing that from clients are they pulling back and big e-commerce projects or pausing to evaluate that further.
It's a really it's a client by client.
The discussion.
And I believe every client.
And understand that as they go forward.
That it's going to be an increasing part of how they reach in service there.
Their customers.
The packaged goods area that you're referring to.
As a reasonable size of our portfolio. It's not this port disproportionate in terms of the balance in the portfolio.
So it's part of the puts and takes that.
That we've seen.
And.
Hum, but as I look forward and as the team looks forward.
It's a very important area.
We are prepared and we've targeted acquisitions in this area.
We're making investments in building out technology in the Commerce area.
To be supportive of that anticipated business.
I don't think you can compare us.
To the.
That environment and the impact it had on certain parts of the market during COVID-19.
People couldn't get out of their houses.
There's going to be a lull in those companies.
It's.
It's more an ever increasing important.
Place to our clients and so therefore to us as we move forward.
And I'd just add it's you know it's another area.
Increase complexity for our clients.
To navigate.
And as a result.
It benefits us because we can help them navigate some.
Some additional choices.
They now have we can help them find customers out of new retail media platform inside a video game.
And more complexity.
You know feeds into the capabilities that we have.
To help our clients reevaluate or evaluate the the decisions they have to make about.
Where.
Most efficiently spend.
Their marketing dollars so.
You know, we certainly we certainly believe E. Commerce is here for the long run it's not going away, we're going to continue to.
Make investments on our side and we think clients will continue to do so on their side as well.
And the proof proof point to this is how many boxes I have to break up.
We delivered to my house.
Uh huh.
Fair point, Okay. Thank you gentlemen, I appreciate it thank.
Thank you.
Next we'll go to line of Craig Huber with Huber Research partners. Please go ahead.
Great. Thank you a similar question what Ben had earlier just look it up looking at this on a three year basis. Your first core up about 12% organically put it up about 10% versus.
<unk> of 19 second quarter throw some numbers show up 11, 3% organic was up six 5% versus two queue of 19, but then using.
Your top end of your guidance for the year of 7% for organic revenue puts the second half of the are up call. It two half to 3%, but again looking at that versus the second half of 19 would only be up one one and a half per sense. We'd go from on a three year basis were up 10% first quarter versus three years ago six 5% in the second quarter top of one one and a half per cent in the back half.
For the year I mean, that's quite a deceleration I know you've said repeatedly you're trying to be cautious here, but I'm just curious I'd love to hear your thoughts nicely is there something else working in here to that that the overall environment is significantly slowing as well.
If that is the case I'd love. It if you could just touch on some of the areas global euro or by a client for client verticals to help explain that significant slowed and again I realize you're saying you're being cautious here I don't blame you at all just love to hear your thoughts further please.
Yeah, except for the.
Execution on businesses, which are required.
Social gatherings.
And by close Downs.
We've talked about.
Hmm.
The math of what you're talking about.
Absolutely correct.
And it's reflected in us being cautious.
I think it was only one short paragraph in my prepared remarks that you can go back and look at where.
I emphasize that word.
And we endeavor everyday.
Two exceeded our forecast so.
It's not a prediction in this environment.
So.
I don't know if I did justice to your question yes.
The.
Craig the portfolio is quite a bit different than it was in 19.
Now here in 2022 so.
You know I can I can certainly.
I can certainly say, we're not focused on 2019 anymore and a you know looking back to how we're growing relative to three years ago. It was not something that.
We spend any time on.
We're focused on the on the portfolio, we have today and how the business is doing today. So as it relates to 19 I don't I don't think there's any meaningful trends that we would draw.
Where you know the world has changed quite a bit since then and our portfolio has changed quite a bit since then.
And I think as far as the numbers go in the second half.
You know two and a half plus percent.
Is.
Just about right in terms of what 7% for the year would be.
And you know I think I think we touched on our cautious outlook and how how we've looked at.
The guidance that we provided and were pretty comfortable with.
With that guidance.
I appreciate it.
Sure Mike.
Question on Asia.
In the second quarter at 4.7% organic number if you took out China can you tell us what the left.
The rest of Asia Pacific would be somewhere up low single to up low double digits somewhere organically to the rest of the portfolio how would it have tracked taken out China is.
She'd give fill one second here.
I'll try to answer your question.
You also have to recall that it's only this year.
This is the third time and God knows how many quarters that I've been around.
Even forecasted revenue.
So being infants at it you're going to.
Formerly.
Infants at it you could anticipate our caution.
So you know.
I think I think it's safe to say the rest of the portfolio and Asia performed consistently.
In terms of organic growth.
With the rest of our portfolio in the reported numbers.
Great that's all I had.
Okay.
Got it thank you.
Thank you.
Yeah.
And at this time there are no further questions handing it back to management for closing comments.
Certainly I'm gonna. Thank you often joining us today.
Really appreciate your time and we look forward to seeing you at investor events over the coming weeks and months.
A lot. Thank you.
Yes.
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