Interpublic Group's third quarter earnings showed yet another period of revenue growth, up 11.5% to $1.7 billion. But once again IPG had negative cashflow. This time, $325 million disappeared.
On IPG's web site, the company always posts its income statement and balance sheet at earnings time. But never its cashflow statement. Dig around in the SEC filings, however, and a surprise emerges: cash is dribbling out of this company to the tune of hundreds of millions of dollars a quarter.
In fact this is the third straight quarter in which IPG has reported negative cashflow. In the second quarter it was a loss of $183 million. In the first quarter it was a loss of $523 million.
You wouldn't know this from the advertising media coverage: they all went with the news that IPG had managed to eke out a tiny $45 million net profit, up from a loss of $22 million the year before.
Where is IPG's cash going? Unsurprisingly, most of it is going on agency execs' salaries. Of the company's $1.7 billion in revenue, $1 billion went on salaries. (Another $600 million went on other operating expenses.)
IPG is actually becoming a more efficient company. For every dollar it spent on salaries this quarter, it gained back $1.59 in revenue. That yield is up from $1.51 last year. So each IPG employee is becoming slightly more productive.
But salaries are still growing at IPG: Up 5.7%, CEO Michael Roth said. That is going to be a problem as the recession works its way through the company. Roth said:
During the past few weeks, it has become clear that the global financial situation has begun to weigh on marketers' spending plans for both the fourth quarter and 2009. As such, we will continue to monitor broader economic developments and to focus on meeting the needs of our clients and managing our margins.
"Managing our margins" is IPG corporate-speak for "reducing what we spend on salaries." (As BNET noted recently, Omnicom has a similar euphemism, "flexibility in our cost structure.")
No company can continue to show positive net income on negative cashflow forever. So here's what's going to happen at IPG in 2009: Roth is going to have to reverse salary growth as clients pull back on spending in order to "manage those margins." That means layoffs.
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