Omnicom Group Q3 2007 Earnings Call Transcript

| About: Omnicom Group (OMC)

Omnicom Group Inc. (NYSE:OMC)

Q3 2007 Earnings Call

October 23, 2007 8.30 am ET

Executives

Randall Weisenburger - VP and CFO

John Wren - President and CEO

Analysts

Troy Mastin - William Blair & Company

Alexia Quadrani - Bear Stearns

Jason Helfstein - CIBC World Markets

Craig Huber - Lehman Brothers

Paul Ginocchio - Deutsche Bank

Karl Choi - Merrill Lynch

Michael Nathanson - SanfordBernstein

Katrina Fallon - Citigroup

Operator

Ladies and gentlemen, good morning. Thank you and welcome tothe Omnicom Third Quarter 2007 Earnings Release Conference Call. At this time,all participants are in a listen-only mode. Later, we will conduct aquestion-and-answer session and instructions will follow at that time.(Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I'd now like to introduce you to today'sconference call host, Executive Vice President, Chief Financial Officer ofOmnicom Group, Mr. Randall Weisenburger. Please go ahead.

Randall Weisenburger

Good morning. We hope everyone's had a chance to review ourearnings release. We've also posted to our website, both the press release andthe presentation covering the information that we'll present this morning. Thiscall is being simulcast and will be archived on our website.

I've been asked to remind everyone to read theforward-looking statements and other information that's included on page one ofour investor presentation, and to point out that some of the statementsdiscussed today may constitute forward-looking statements. These statements arepresent expectations and actual events or results may differ materially.

We'll begin the call with some brief remarks from John Wren.Following John's remarks, we will review our financial performance for thequarter in more detail. At the end of the call both John and I will beavailable for questions.

John Wren

Thank you. Thanks for joining our third quarter call thismorning. Our third quarter performance and that of the first nine months of theyear, I believe, was excellent. Our advertising agencies and marketing servicecompanies continue to grow across all the disciplines throughout the world. Theonly thing we saw this quarter, the only two sections that showed broadstatements, are two small business units, which are primarily U.S. based.They are recruitment advertising and the yellow pages business. Besides that weare very pleased with the growth we've seen across all of our companies.

As Randy will cover in a lot more detail, our net new businessfor the quarter and for the first nine months reflects our continued ability toextend our services to the finest companies in the world. And our continuedinvestment in the development of our people, we believe, is still thecornerstone of our consistent performance.

At this point I'll turn the call back over to Randy andhe'll take you through our presentation and then we'll be happy to answer anyquestions you might have.

Randall Weisenburger

Thanks John. As John pointed out we are very pleased withthe performance of our agencies across the board. But before I get to theresults, I would like to remind everyone that the results are adjusted for thetwo to one stock split that occurred earlier this year. And all the current andprior period per share amounts and weighted average share amounts have beenadjusted in accordance with SFAS 128.

So with revenue; revenue growth in the third quarterincreased $327.1 million to $3.1 billion. That was an increase of 11.8%. As aresult, revenue for the nine months increased 11.1% to almost $9.1 billion.Operating profit for the quarter increased 13.9% to $350.2 million. That's anoperating margin of 11.3%, which was about 20 basis points higher than thethird quarter of last year.

For the nine months, operating profit increased 11.7% tojust over $1.1 billion. That made an operating margin of 12.4%, which was inline with last year’s reported margin. However, excluding a couple of one-timeitems that impacted last year margins, improved roughly 10 basis points.

Over the first nine months of the year, we've continued toincrease our investment in our people, in training, in technology, and in newnumerous new business development initiatives, which together resulted in ourstrong year-over-year growth. And we believe we've positioned the company wellgoing forward.

We believe these investments have significantly benefitedour new business record, which this quarter totaled $1.25 billion andyear-to-date has been about $4.2 billion. We believe that these investmentshave also been key for our consistent industry leading revenue performance.

Interest expense, for the quarter was $19.3 million. Thatwas down about $7.4 million from last year. The year-over-year improvement isprimarily the result of not needing to pay any supplemental interest on our2031 and 2032 bonds. That savings is offset by higher overall interest rates onour short-term borrowings and increased daily average borrowings resultingprimarily from our share repurchase activity.

On the tax front, our reported tax rate for the quarter andyear-to-date was about 33.9%. That was a bit up from last year. As you mayrecall, last year’s rate was favorably impacted by a couple of non-recurringitems. As of those items the underlying tax rates are fairly consistentyear-to-year.

Net income for the quarter increased 14.2% to $202.2 millionbringing the year-to-date total up to $661.9. That was an increase of 12.8%.And diluted earnings per share, reflecting our performance for the quarter aswell as the impact of our share repurchase activity increased 19.2% to $0.62 ashare, bringing the year-to-date earnings to $2 per share, up about 18.3%.

Analyzing our revenue performance, FX in the quarter waspositive 3.6% or adding $99.1 million to revenue. Looking ahead to Q4, if ratesstay where they are, FX should continue to be positive in the 3% to 3.5% range.

Growth from acquisitions, net of divestitures was alsopositive, increasing revenue by $33.4 million or about 1.2% in the quarter andby $41.6 million or about 25% year-to-date.

In Q3 we finally cycled out of the impact of the sale of thehealthcare business, which had been pulling down our acquisition growth overthe past several quarters. During the quarter we closed five new acquisitionsand appeared to be on track to close several more in Q4.

Organic growth continued to be very strong, coming in at 7%in the quarter and accounting for $194.6 million of our revenue growth.Year-to-date, that leaves organic growth at 7.2% adding about $590.7 million toour revenue.

As for our mix of business, traditional media advertisingaccounted for 41.7% of our revenue and marketing and services 58.3%. As for therespective total growth rates, advertising was up 12.1% and marketing andservices increased to 11.6%.

Breaking down marketing and services revenue for thequarter, CRM was approximately 37.6%, public relations 10.2% and specialtycommunications 10.5%. As for their respective total growth rates CRM continuedto be very strong at 14.2%. Public Relations slowed a bit for the first sixmonths; however the performance remained quite strong at 9.7%. And specialtycommunications increased 4.8%. In this sector, healthcare was fairly strong inthe quarter, but the sector was pulled down by weakness in recruitment,advertising and yellow pages.

Our geographic mix of business in the quarter was 53.4% U.S. and 46.6%international. In the U.S.,total revenue growth in the quarter was $114.4 million or 7.4%. Acquisitionsaccounted for 1.4% of that growth, or $21.6 million Organic growth was up 6%,adding $92.8 million.

International revenue increased $212.7 million or 17.2%.Acquisitions added $11.8 million, FX as I mentioned, was very positive adding$99.1 million, and organic growth accelerated to 8.3% in the quarter, adding a$101.8 million to our revenue.

Our international organic growth was driven largely bystrong performances in North America by Canadaand Mexico; in Europe by Germany, the Netherlandsand Italy; and in the largeemerging markets of Brazil, Russia, Chinaand India.I should also mention Australiaand New Zealandalso posted very positive results.

Cash flow for the third quarter has been strong andconsistent with our historical trends. Our cash management programs havecontinued to perform well. We believe everyone knows our primary source of cashis net income, adjusted for basic non-cash charges, which for us are primarilystock based compensation charges and the related tax benefits and thendepreciation and amortization.

Our use of cash dividends were recently increased by 20% to$0.15 per share on a split adjusted basis. Year-to-date our dividends havetotaled $133.7 million. CapEx totaled $160.8 million, acquisitions net ofdispositions and assets sales including earn out payments on prior acquisitionsyear-to-date totaled $317.9 million, and share repurchases year-to-date havetotaled $846.5 million.

We also received $68.4 million of proceeds from optionexercises and stock sold under employee stock purchase plan that resulted innet repurchases of about $778.1 million. As of result our average diluted sharecount for the quarter was reduced to 328.2 million shares and we finished thequarter with diluted shares outstanding by approximately 326 million.

With that now I'll ask the operator to open the call forquestions.

Question-and-AnswerSession

Operator

Great, thank you very much. (Operator Instructions). Andyour first question this morning comes from the line of Troy Mastin withWilliam Blair & Company. Please go ahead.

Troy Mastin - WilliamBlair & Company

Good morning. Thank you. Advertising growth remains prettystrong. I think you have paced marketing services growth in the quarter despitesome challenges in traditional media. Is there anything that's specificallychanges; maybe in the way you are selling or going to market that's drivingthis out performance despite these challenges in traditional media or somethingelse?

John Wren

No, Randy is about to go.

Randall Weisenburger

The only thing that’s worth noting, is our digital businessis in two buckets. Our standalone digital businesses are showing in CRM.However, the digital work that’s being done in our traditional agencies isbeing categorized as traditional media advertising, the way our systems work.So that’s somewhat, on as inflating driver, but it’s keeping the strong growthin digital, and in our traditional agencies is aiding and driving the growth ofwhat’s coming through is traditional.

John Wren

Yeah, you will see that Troy, there has been some publicity forcompanies like Goodby Silverstein, which two years ago were 100% traditional.We don’t track it exactly because we are trying to migrate everything else toan appropriate model where the trade press and stuff has stuff has come out andsaid that the mix there is 60:40 today. A story you’ll probably see in thisnext weeks is a similar story with a company called 180 where a year ago it wasall traditional, today it's not. That’s also embedded in the activities of someof our bigger agency offices throughout the networks.

At this point, we don’t draw such a fine distinction in theway that we gather the numbers, because our objective is to make certain thateveryone of our companies is moving in that direction as appropriate inreflecting the needs of our clients. So...

Randy Weisenburger

It’s a little bit of mixed result that way.

Troy Mastin - WilliamBlair & Company

So it's fair to say that your exposure to traditional mediais declining in total as part of your mix over time?

John Wren

Yeah. That would be fair and that would also be consistentwith what's been going on in the company for the last 10 to 12 years. But yes.

Troy Mastin - WilliamBlair & Company

Okay good. It's just not so obvious in the numbers andthat's good to have that clear.

John Wren

No, it's important, but…

Troy Mastin - WilliamBlair & Company

And then you mentioned …

John Wren

How can you get there, I am sorry.

Troy Mastin - WilliamBlair & Company

I was trying to say, you mentioned the two small U.S.units that you had some challenges in on the marketing and services siderecruitment and yellow pages?

John Wren

Right.

Troy Mastin - WilliamBlair & Company

Curious what you think about the long-term outlook for thesetwo businesses. Are we just facing a secular headwind in the near-term or arethere some issues here long-term and are these businesses that you feel likeyou need to be involved in the long run?

John Wren

Well recruitment, these are not big business platforms forus. They just happen to be good companies which are part of the group. We areconstantly evaluating that. In the case of recruitment advertising, I have seenthis happen. Now, I can't tell you how many untold times, starting in 1988 whenthe company was formed, it is cyclical to what's going on directly in theeconomy in the U.S.

Yellow pages, I think is, traditionally is a more challengedbusiness model as you move forward. But it's again not - it's not a very bigunit within Omnicom, it's just organic growth would have even been greater I thinkdomestically, as these two individual units are being challenged.

Troy Mastin - WilliamBlair & Company

Okay and then finally on acquisitions. They picked up nicelyin the quarter. Curious what we should expect going forward. What you could sayabout the M&A market in terms of where you're focused? Where valuations lieand so forth?

John Wren

As you've known largely through the absence of acquisitionsover the course of last several years, we are extraordinarily disciplined interms of what our needs are and the prices we are ultimately willing to pay.And increasingly, especially when you get in to areas of digital and some ofthe new emerging technologies, in 85% of the cases over the opportunities thatpresent themselves, you face with a build versus a buy strategy on many ofthose things. And off times we have opt into to go to the build side of it.

The pipeline still remains very robust, if market trendscontinue in terms of private equity and other things, we should, I think, seeprices come more in line with what our disciplines say we should pay. There isno way to be predictive of it, other than to say that we will in fact bedisciplined and do whatever is appropriate for our business units.

Troy Mastin - WilliamBlair & Company

If those prices come in line with your discipline, do youthink we could see you return to the 2% to 3% range or something you used totalk about years ago?

John Wren

I am not in a position to forecast that, what we do is ouracquisition polices really, we base it on the needs of the business units intransforming them to whatever they should appropriately be or to extend ourgeographies or to extend our product lines. That's a process which starts atthe business unit planning level. We keep the pipeline, because we do talk toeverybody.

So, I think we are aware of what's available and what isn’t.But our actions are based upon a further analysis of what's the pricing, isthere another way to accomplish that task, which often times is an investmentin people, which gets reflected in our P&L's, but contribute we believe toour long term growth. So we really are not in a position to predict whatacquisition revenues would be from my perspective. I don’t know if Randy mightbe able to add some color to that.

Randall Weisenburger

I think that's right. Over the last couple of yearsacquisition revenue has been pulled down a little bit, because of a coupledivestitures. As I mentioned in my comments we finally cycled on the sale ofthat healthcare business that we did last year at the beginning the thirdquarter. That's really the primary reason why this quarter acquisition revenuesort of had a step change. We're constantly evaluating our portfolio ofcompanies as well. But again it's difficult to predict exactly what's going tohappen.

Troy Mastin - WilliamBlair & Company

Okay. Thank you.

Randall Weisenburger

Thank you, Troy.

Operator

Thanks and your next question comes from the line of AlexiaQuadrani with Bear Stearns. Please go ahead.

Alexia Quadrani -Bear Stearns

Hi thank you. John in your conversations with advertisers,is anyone talking about a pullback in spending going forward due to the(inaudible) economy. Are they generally, is their tone generally the same as ithas been all year?

John Wren

Well, first of all in a macro sense we'll be spending thenext 60 days going through our profit planning cycle, where we'll garner moreinformation from our individual companies. There is no question that especiallyin the United Stateswith all the stuff you see on the news channels and all the rest of it. Thereare certain sectors which and the price of oil that will be challenged I thinkfor the next couple of quarters. That's offset by emerging markets and some ofthe growth we are seeing outside the United States.

So most of the companies we are servicing are multinationalin nature, and so total budgets don’t shift may be where they spend theirmoney, or how they spend their money is subject to a change. We are not seeingany, anything other than the obvious at this point. We have always been, and wewill continue to be very conservative in the way we approach our own company inrunning it.

Alexia Quadrani -Bear Stearns

And then when you have these sort of discussions over thenext 60 days or so, do you have a sense just from past experience how firm theytend to be, I mean, how much and now that is initialed sort of discussions, butdo you have a good sense of the revenue for ’08 based on those discussions oris there still lot of volatility?

John Wren

There is always volatility. It is volatility offset by amodel which produces consistency, but on an individual client in an individualsector. There is always volatility and I don’t think we garner enoughinformation in our year end profit planning cycle to predict 2008. We look attrends and factors and other things. I think some things which I have seen inthe past, which have benefited advertising and marketing will occur in 2008.Even though we are not directly involved in the elections, they do have animpact. We have the European [Soc], we have the Olympics. So, whereas there ishead wins in certain sectors, there is certain underlying benefits which areout there as well. It's just too early to call.

Alexia Quadrani -Bear Stearns

And then just lastly, any major really significant changesthroughout the quarter, I know you don’t give obviously monthly data, but ifthere was any significant change in trying to slow down as the quarterprogressed, if you could highlight that, and if that would, you know any reasonwe shouldn’t accept sort of the very good growth that you've continued to haveall year into Q4.

John Wren

Well Randy wanted to add something before, but Q4 is alwaysour largest quarter, so it always the most challenging when you look at growth.I am reading into your question. We don’t see anything fundamental, whichchallenges our performance at this point.

Randy Weisenburger

I certainly think there is nothing that seems to be changinggoing into Q4. Obviously a lot of economic noise the marketplace, but as Johnpointed out we really haven't heard anything from clients other than sort ofgeneral marketing concerns I guess. I haven't heard about any changing spendingpatterns yet.

John Wren

The one thing that is constant Alexia is that clients areinterested in ROI on their advertising and marketing investments and that's anarea, which I believe will continue to grow. That I am very comfortable withthat trend is only going to accelerate not decelerate.

Randy Weisenburger

A point I was going to make earlier on predictability ofrevenues. A large percentage of our model is predictable, probably maybe it's85% or 90% or maybe it's even a little bit higher of our base revenue is highlypredictable. That last, lets say it's 5% or 10%. The fact that its volatile butmore potentially variable, but spread across the larger number of clients,ultimately creates a lot of consistency because of its diversity. But thatpercentage can certainly vary, year-to-year or you don't start the year knowingwhat that's going to be.

Alexia Quadrani -Bear Stearns

Okay, thank you very much.

Randy Weisenburger

Thank you.

Operator

Thanks and our next question comes from the line of JasonHelfstein with CIBC World Markets. Please go ahead

Jason Helfstein - CIBCWorld Markets

My question was already answered. Thanks.

Randy Weisenburger

Thanks Jason.

Operator

Thank you. And then we're going to go a question from theline of Craig Huber with Lehman Brothers. Please go ahead.

Craig Huber - LehmanBrothers

Yes. Good morning, thank you. You guys had got a questionlot of last couple of years. If a large firm like Google that they wouldpotentially take a lot of your potential revenues away in the coming years.What do you typically tell investors in your defense, against that argumentfrom investors?

John Wren

We were not Google's largest customers, which is something Idon’t think anybody focuses on. We're essentially in the area of content andmanaging clients down to the consumer. What I see Google doing is providing aplatform which is more challenging to existing medium networks than to what wedo.

Randall Weisenburger

Google seems that they have sort of two pieces of business,when you think about it. They started out with some fairly interesting content,which was in the tools for consumers to better utilize the Internet. Frankly inindexing tool, and they obviously came out with a lot of other very interestingproducts between, Gmail and Google Maps etcetera.

In order to get paid for their content, they needed todevelop and were pretty intelligent in developing an advertising based model oradvertising based platform and Ad sense that allows them to monetize the tact.Today it seems like they are going down similar paths, thinking about more waysof adding content and utilizing their technology to develop a better and betterad serving platform.

I have never heard them wanting to get into the servicesmodel. Our companies are about helping clients, market their products andobviously we are going to use every tool and every service that's availablethat generates the best return on investment for our clients. So Google is certainlyan innovative company in both creating interesting content as well as creatinguseful platforms and technology for marketers to get to their customers with.

Craig Huber - LehmanBrothers

Then also if you could just switch over to [profit] marginsfor a second, Randy you've been pretty loud going into the [share to expectedmargins] basically flat for the year they were up slightly in the quarter. Wasthat just noise in the quarter or the revenue that should come in a littlebetter than you expected? I assume you did not pull down any of investmentspending? Just talk a little bit, thanks.

Randall Weisenburger

We've not pulled down the investment spending. I think ouragencies and certainly the Omnicom level that's probably continue to increase.Plus or minus let say 10 to 30 basis points is pretty tight to predict. When Itell people flat margins that's kind of what I am trying to tell them to modeland obviously we are hoping to achieve that or even achieve a little betterthan that.

Craig Huber - LehmanBrothers

Then lastly, both of a nit tick question, just looking atyour cash flow statement. Just, point of the difference is that the working capthis year was $300 million to $350 million or more of a use and CapEx is upabout $40 million. Is that just timing issues, which the investor expects forthe full year for both of those categories? Thanks.

Randall Weisenburger

First of all, working capital is purely a timing issue. Ifind the GAAP cash flow statements personally difficult to read. On the workingcapital front for this quarter in particular this quarter ended on a Sunday.That resulted in a couple of days more cash, lot of boxes, which makes itworking capital and you can as much as $200 million to $300 million a day inworking capital cash flow swings. So, internal we track daily averages morethan these quarter end numbers. The other number that I do is I lookyear-over-year, so I go back to the third quarter of last year and track netincome, depreciation and amortization, acquisitions, stock repurchases etceteraand show it on a year-over-year basis it tracked very well.

CapEx, two things, some of that I will say timing, I meanour big CapEx items are associated with real estate relocation; basicallyincreases in build outs, there have been a couple of those this year thatprobably move the numbers a little bit. I mentioned a couple of times in thepast that, we will probably shift some of our traditional leasing, operatinglease capital to more of a CapEx model or capital leases. That probably accountfor may be as much as $10 million of the year-over-year increase.

Craig Huber - LehmanBrothers

Okay, then just lastly if I could. You tell me yourcalculation, if you pulled out your recruitment and this yellow page businessanother small. What would the organic revenue growth have been in the quarterin the U.S.at least?

Randall Weisenburger

I don’t know, I didn’t do the numbers. I didn’t look at itthat way.

Craig Huber - LehmanBrothers

Okay. Thank you.

Operator

Thanks. And the next question then comes from the line of PaulGinocchio with Deutsche Bank, please go ahead.

Paul Ginocchio -Deutsche Bank

Thanks, just asking a question about margins for thosepure-play digital operations. Because of higher I guess digital salaries orpeople interactive are those margins better or worse than you'd say you're moretraditional agencies. Thanks?

Randy Weisenburger

I think they're pretty much in line with our traditionalagencies. Right now, the demand for those services is pretty high. So theutilization rates in those units are pretty high. The services and the growthin those agencies is actually coming probably faster than we can recruit thequalified people to staff them.

Paul Ginocchio -Deutsche Bank

Okay, thank you.

Randy Weisenburger

Thank you.

Operator

Thanks. And we have a question now from the line of KarlChoi with Merrill Lynch. Please go ahead.

Karl Choi - MerrillLynch

Hi good morning, couple of questions here. The first one iswith the economic headwinds in the U.S. seems to be facing. Do youthink that U.S.organic revenue growth maybe will continue to trial a little bit the internationalorganic revenue growth in the next couple of quarter at least? And second islooking at the reported revenue growth for international markets outside the U.S.,it went from 9% in the second quarter to almost 20% in the third quarter. Wasit just the function of cycling through the Australian divesture or was thatthe underlying acceleration? Thanks.

John Wren

I didn’t quite get your first question, if I could ask youjust, I mean hear it, have you got…

Randy Weisenburger

If I got your first question was U.S. economic growth?

Karl Choi - MerrillLynch

Well, U.S.organic revenue growth versus international. International this quarteroutperformed the U.S.and this was the first time I think in about a year. Just wondering whether youthink this trend will continue.

Randy Weisenburger

Don’t know. The two businesses that we mentioned inrecruitment advertising, yellow pages, those are domestic businesses, fastmajority domestic businesses. So, that negative is impacting here and notinternationally. Internationally certainly some of the larger emerging markets,Brazil, Russia, India,Chinathey have exceptionally high organic growth rates. Another area that’s got avery good organic growth rate, extremely high is the Middle East. Those are certainly pulling up. The U.S. compared to EuropeI think is pretty consistent. So, the combination of those two factors at leastthis quarter gave international a bit of tail wind.

Your second question was the divestiture, last year we werepulled down, because we sold the business in Australia. The health care businessthat we sold a year ago that was predominantly a U.S. business.

Karl Choi - MerrillLynch

Okay, and based on the acquisitions that you have done Randycan you give us a sense about what you think the acquisition contribution canbe in the fourth quarter?

Randy Weisenburger

I would think probably some place in the 1% to 1.5% range isprobably in the ballpark obviously depending upon dispositions or anything thatwe might do.

Karl Choi - Merrill Lynch

Great, thank you.

John Wren

Thank you.

Operator

Thanks and our next question then comes from the line of MichaelNathanson with Sanford Bernstein. Please go ahead.

Michael Nathanson - Sanford Bernstein

Thanks, I have two for John. John the first question is yousaid that the recruitment in yellow pages is a small number. Any sense of whatpercentage of your revenue base is exposed to domestic recruitment in yellowpage, would it be less than 2% or so.

John Wren

Yes. How much I know.

Michael Nathanson - Sanford Bernstein

Okay.

John Wren

Without looking. Yeah, these are relatively small businessesand that's what they are.

Michael Nathanson - Sanford Bernstein

Okay.

John Wren

They are good businesses for us. We've looked at themconstantly as we would look at our entire portfolios to, but right now they areokay and it's not unexpected that we have the impact we have.

Michael Nathanson - Sanford Bernstein

Okay, and then the question I have is, I think people aretrying to ask this question but have you see any change in behavior amongcertain U.S. client groups, like say consumer finance. If the point you may Ithink is you have not really seen any change in spending behavior. But I wonderhas anyone's mix shift change have you seen in the past couple of quarter'smaybe some of the sectors that have been under more pressure changing theirspending behaviors in terms of changing mix?

John Wren

Not that I call it a trend other than say from a macroperspective. As I mentioned earlier clients increasingly are spending theirmoney in areas that are measurable. So that's why you see the growth in CRM andsome of the other areas. And I think that's a trend that'll continue that'sboth online and offline in the way that it gets delivered. So, we are notheavily exposed to the financial areas that you are referring to in terms ofour client base. So we may not be a very good proxy for macro trends in thatarea.

Michael Nathanson - Sanford Bernstein

Okay, but I guess, so I will follow up someone else, [but Iguess the point], what may be perhaps the spending is still there, but justcoming in different buckets? So people may be asking the wrong questionsactually?

John Wren

For the last couple of years I have seen incrementalincreases in marketing budgets go to new areas, but that hasn’t necessarilydestroyed the base, or come at the expense of the base. You see incrementaldollars being spent. Again, against that macro trend of ROI.

Michael Nathanson - Sanford Bernstein

Okay. Thanks.

Randall Weisenburger

I also think as you see further and further segmentation ofthe consumer. It's making it where marketers are needing to use more and moreavenues to get to their ultimate consumer. Obviously, they want greatermeasurability or better metrics for return on investment. People have beenseeking those things and improving technology to be in, allowing for bettermetrics. Obviously as an industry we are not where we ought to be yet.Fortunately, there is more and more technological platforms and tools beingdeveloped that will allow our companies to do a better job of that.

John Wren

And that’s very consistent with our business model, which isshare of wallet. We are not married to any particular technique or area indelivering that consumer, and no matter how complex the market becomes, for thebenefit of our clients.

Michael Nathanson - Sanford Bernstein

Thank you.

Randall Weisenburger

Thank you. And we have got time for maybe one more question…

Operator

Okay, very good, the next question then comes from the lineof Katrina Fallon with Citi. Please go ahead.

Katrina Fallon -Citigroup

Great, thank you sir for letting me get the last question.Randy, excuse me if I missed this, but did you give the percent of totalcommissions and fees that went towards salaries and related costs?

Randy Weisenburger

No we didn't.

Katrina Fallon -Citigroup

Is that something that you have now or should I follow upwith you afterwards?

Randy Weisenburger

I don't have it off the [sitting] right at my fingertips, soif you can follow up afterwards, it would be better.

Katrina Fallon -Citigroup

Okay, great. Then just kind of big picture wise, as we seemore growth in digital, maybe mobile advertising, are you seeing an increase inthe types of salaries that you need to compensate these people with more of thehigh technology skills or is it just kind of a lost in the wash?

Randy Weisenburger

I think right now because of the sort of the rapid growth indigital. Certainly what I am hearing is that's an area that, it's a verycompetitive recruiting marketplace. Generally our clients, they allow us to geta reasonable return after our costs. All of the people in the industryproviding those services are faced with the same labor pool from a costperspective. So I don't think it really impacts our margins as much as ourability to recruit and retain that talent. Fortunately it's a pretty liquidmarketplace over say a couple of year timeframe. More and more people are beingtrained in how to use the new technologies, new marketplaces, digital mediaetcetera. And at the same time more and more tools are being developed to makework in that area easier and more marketing focus versus pure technology focus.

Katrina Fallon -Citigroup

Right.

John Wren

And then ultimately we are benefited in the long run by puredemographics of the age of our work force. There is not too many 24 year oldscoming to work for us today, that remember the Michael Jackson TV commercialsof the 80s to just barely born. So, as time progresses and we have a relativelyyoung work force especially in the United States, but through out theworld. Those people grew up in an environment of the complexity that we weretalking about, and they have become employees of what traditionally has been perceivedas traditional agencies. That's why I think you see the rapid change inexamples like Goodby, Silverstein, like as said a like company 180 and thenothers in terms of the way that we are delivering services, our employees don’tthink in traditional terms, because they grew up in an environment that’spresent today.

Katrina Fallon -Citigroup

Great, and then just one question. I know there was aquestion about Google, but if I could jump over to the other large technologyplayer. What do you think is going to happen with Microsoft and the aQuantiveacquisition? Do you see any; are they losing any clients there at Avenue A or Razorfish?Are you benefiting in anyway? And then also, do you think that that’s a viablepath for a company like Microsoft to go in or do you foresee that over timethey might divest those businesses?

Randy Weisenburger

You will have to ask Microsoft. Looking from the outside itseems like the primary aspect of their acquisition was the technology platformthat they got from aQuantive. RazorFish is a very good digital agency. I wouldthink it’s a great internal data site. Their objective is to build tools andtechnology platforms to serve the advertising and marketing community, which isultimately what I think their core objective is. One of their challenges is toget people to spend the time to [bait] to their products and services to helpthem develop it. Without that insight, being spread around the industry beforethe product or service can be unveiled. I would guess having a captive agencyto aid in that, might not be a bad thing.

John Wren

I do know that they still remain a very large client of twoof my competitors. So they have invaded everything.

Katrina Fallon -Citigroup

Great, wonderful, thank you so much.

Randy Weisenburger

Thank you. And thank you all for taking the time to listento our call.

Operator

Great, and thank you very much. And ladies and gentlemen,that does conclude our conference for today. Thanks for your participation andfor using AT&T's Executive Teleconference. You may now disconnect.

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