Omnicom Group Inc. (OMC) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. And welcome to the Omnicom Fourth Quarter Year-End Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-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 would now like to introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Thank you, and thank you all for taking the time to listen to our fourth quarter 2007 earnings call. We hope everyone's had a chance to review our earnings release. We posted to our website both the press release and the presentation covering the information that we are going to present this morning. This call is also being simulcast and will be archived on our website. Before we start, I have been asked to remind everyone to read the forward-looking statements and other information that's included on page 1 of our Investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements, and that these statements are present expectations and actual events or results may differ materially. We are going to begin the call with some brief remarks from John Wren, following John's remarks, we will review the financial performance for the quarter, and then both John and I will be happy to take questions.

Good morning and thank you for joining our call this morning. 2007 was an excellent year for the group and as Randy as just mentioned, he'll take you through all the details in just a couple of minutes. There are couple of areas I would like to highlight. Our revenue growth in the fourth quarter was very strong in the U.S., and this is also supported by very strong growth in most European countries, as well as Asia and South America. Growth in the UK and France did slow during the quarter, but I don't believe it's a trend, I just believe it slowed in the quarter. Over the course of the past 12 months, our revenue growth was very strong in all of our markets and disciplines. While you may see some peaks and valleys in specific numbers in individual quarters, overtime I think you'd agree that our performance is very consistent. We are also very pleased with our businesses and believe that we are well positioned going into 2008. Our agencies continued to be unsurpassed in their creative recognition, and we have a wonderful list of clients who, like everyone else is a little bit nervous about the economy, but we haven't seen any major or serious cutbacks in spending as of today. A key component of our success also lies in our ability to invest in our business, and during this past year, we invested record levels and we plan to continue to do the same thing in 2008. We are also seeing a rise in acquisition activity, and as you know, we're very, very disciplined about that, especially the return that we get on investors that we make and also our ability to integrate them, but activity has picked up and pricing, I believe is coming inline more with historic expectations. Switching to net new business, which Randy will covered in lot more detail. Our net wins for the quarter were just under $400 million that brings our net new business for the year to $4.6 billion, which was an increase of about $400 million over 2006. The two accounts, which drag their growth down a little bit for this one quarter was the portion of the Dell account which we lost, we lost only a portion of that, and the AT&T media accounts, but I am happy to say that AT&T continues to grow with us as a significant client. At this point, I will turn the call back over to Randy, and then he will take you through the numbers, and then we'll be happy to answer your questions.

Thank you. As John noted, we are very pleased with the strong performance of our agencies in 2007, and while it's still early, we appear to be off of a very solid start for 2008. Revenue growth in the quarter increased $409.8 million to $3.6 billion that was an increase of 12.7%, as a result for the year revenue increased $1.3 billion or 11.6% to almost $12.7 billion. Operating profit for the quarter increased 12.2% to $531.9 million, and that's an operating margin of about 14.7%, which was in line with the fourth quarter of last year. For the year, operating profit increased 11.8% to just over $1.6 billion, and the operating margin was 13.1% and that was up marginally over the last year. During 2007, we continued to increase our investment in our people, in training, in technology, and in numerous new business development initiatives, which together have resulted in our industry leading organic growth and leaves the company very well positioned for the long term. On the new business front, as John pointed out, our net new wins in the quarter totaled $381 million, bringing our full year total up to $4.6 billion, which was about 10% increase over the last year. They are frequently pointing up every quarter, new business seems to have two groupings, larger accounts of which there are generally only a handful each quarter, and they are generally U.S. and advertising centric, and then there is what I lovingly describe as the engine room, which given the international and multidiscipline nature of our business, there are very large number of smaller accounts that are rewarded each quarter. This quarter, we are on the loosing end of the Dell consolidation where DVD and OMD were two of the more then 50 agencies worldwide serving Dell and GSD&M lost the portion of the AT&T media business and that account consolidation. While GSD&M didn't win the media consolidation assignment, we do continue to expand our overall relationship in all of the disciplines with AT&T. In the engine room, we had an excellent quarter with more than $1 billion dollars of net new business wins. In aggregate, excluding Dell and AT&T, net new wins in the quarter would have approached $1.5 billion. Although we certainly would have preferred to be on the winning side of these two larger accounts, overall we are very pleased with the strong new business performance of our agencies and the result being market leading organic growth performance. Net interest expense for the quarter was $14.3 billion, which was down about $9.8 billion from the fourth quarter of last year and down by $17.6 million to $74 million for the full year. The year-over-year improvement is primarily the result of not needing to make supplemental interest payments during the year on 2031 and 2032 bonds offset by having four quarters this year, versus three quarters of interest on our fixed rate note that we issued in the beginning of the second quarter of 2006. Also higher overall interest rates on our short-term borrowings and increase daily average borrowings resulting from our share repurchase activity during the year. A quick note or update on our 2031 bonds, many of you have probably seen last week, we offered bondholders a supplemental interest payment of $9 per bond, on those bonds, as a result none of the bonds were put back to the company, by itself, this increased our interest expense in 2008 by about $7 million. On the tax front, our reported tax rate for both the quarter and the year was about 33.9% that was up a bit from last year. As you may recall, last year's rate was favorably impacted by a couple of small one-time items, absent those items, the underlying operating tax rates are fairly consistent year-to-year. Net income for the quarter increased 13.2% to $113.9 million, bringing the full year total up to $975.7 million that was an increase of 12.9%. And in fully diluted earnings per share reflecting our performance for the quarter, as well as the impact of our share repurchase activity increased 18.5% to $0.96 per share, and our year-to-date diluted EPS increased 18% to $2.95 per share. Analyzing our revenue performance, first, FX in the quarter was positive 5% or about $161.7 million. Looking ahead, if rates stay where they are FX should continue to be positive in the 3% to 4% range for the first quarter, and then we'd step down about 100 basis points in Q2, and additional 100 basis points in Q3, and would be flat in Q4. Growth from acquisitions, net of divestitures added about $36 million to revenue in the quarter, or about 1.1%, or about $78 million for the full year and about seven-tenths of a percent. During the quarter, we closed two new acquisitions and started off 2008 with a couple of additional investments. As John pointed out, acquisition activity or acquisition opportunities seem to be improving and the pricing seems to be coming back in line. On the organic front, revenue growth continued to be very strong, coming in at 6.6% for the quarter, adding $211.9 million to our revenue. For the year, organic growth was 7.1% adding $802.6 million. As for mix of business, traditional media advertising accounted for 43.5% of our revenue, and marketing services 56.5%. As for their respective total growth rates, advertising grew 13.1% in the quarter and marketing services 12.5%. Breaking down marketing services revenue in the quarter, CRM continued to be very strong growing at 13.3%, public relations, which was a bit slow in the beginning of the year came on very strong in the second half it was up 9.6% for the quarter, and then specialty communications increased 12.2%, driven by excellent performance in our healthcare agencies and an acquisition in Q3. On a geographic front, our mix of business in the quarter was 51% U.S., 49% international. In the U.S. revenue increased $160.8 million or about 9.5% acquisitions added $18 million or about 1.1%, and organic growth was very strong at 8.5%, adding a $142.8 million. Internationally, revenue increased $249 million or 16.3%, $161.7 million of that was FX, which was about 10.6% growth. Acquisitions added $18.2 million and organic growth was 4.5% adding $161.7 million. Obviously, we had excellent performance in the United States this quarter and for the year. Internationally, this quarter we had strong performances in the emerging markets of Asia, the Middle East, Latin America, and Eastern Europe, as well as in established markets of Asia like Australia, New Zealand, Hong Kong, and Korea. We also had excellent performance in the other North American markets of Canada and Mexico, and we had some mix results in Europe, as John mentioned which appeared to be some potential timing issues between Q3 and Q4. Overall, we believe it was an excellent quarter and our agencies in general appeared to be off to a very good start for 2008. The cash flow front, the year was very strong and our performance was consistent with our historical trends. Our cash management programs continued to perform very well, as most of you know, our primary source of cash was net income adjusted for basis non-cash charges, which for us were primarily stock-based compensation charges and the related tax benefits, then depreciation and amortization. These items totaled $1.27 billion in the quarter. Our primary uses of cash... I am sorry $1.27 billion for the year. Our primary uses of cash, our dividends, they totaled $182.8 million, capital expenditures totaled $223 million. Acquisitions including earn-out payments on prior acquisitions totaled approximately $358... $358.8 million, and then share repurchases for the year totaled almost $900 million, but we also received just over $100 million of proceeds from auction exercises, and stock sold under employee stock purchase plan, that resulted in net repurchases of about $798.8 million. As a result of our repurchase activity, our average diluted share count for the quarter was reduced to 327 million shares, and we finished the quarter with diluted share outstanding of approximately 326 million. With the heavy share repurchase activity this year, due to the continued improvement in our cash management programs, we finished the year with net debt outstanding of $1.2 billion, that was up only $91 million year-over-year, and our operating leverage, as measured by net debt-to-EBIT, and EBIT-to-net interest continued to improve. On that note, I am going to turn it back to the operator, and John and I'll be happy to take your questions. Thank you. Question And Answer

Thank you. [Operator Instructions]. And our first question this morning comes from the line of Alexia Quadrani with Bear Stearns. Please go ahead.

Thank you. John, can you give us a bit more color on what your clients are saying about the outlook, I mean how they are spending in general. You've been in this business for a long time and to you does this feel more like, more moderate growth here or more like in 91 or 2001?

Sitting here today, Alexia, all our clients, but not all, most of our clients are under some pressure to commodity prices and all the rest for their own businesses and they are very concerned with the effectiveness of their marketing efforts. That has been a theme for a long time, it gets punctuated a bit when you have unsettling economic times, which is good... it's good for the industry this year as you do have only Olympics, you have the European soccer, you have the elections, all those will help in 2008 in a macro sense in terms of advertising in New Year, I believe. We are not seeing cutbacks, we're not seeing... I think there is cautious tone out there, but that's... that's about all that is, at the moment. We remain cautiously optimistic. We're very careful as you know, and we have been through slowdowns of moderations of growth before, and I think the company has formed very well. So we're optimistic and there is a lot of good things happening, but we are also, as I said, we've been to this movie and we will weather it very well, I think.

And I guess given the cautious tone or the degree of caution is, how has that change I guess the way you've managed your investments for your expenses, if at all?

That's not; there's really been no change. We haven't had to make a change, because we haven't seen any reductions in budgets or so we haven't really had to take any action across most of our businesses. We are just a bit cautious about the environment, and we watch it... we've always watched it very closely. We will watch it very, very closely to just see what industries are hurting, what can be done and how do you invest in personnel and how do you invest in longer-term commitments. But, we've been note the auto industry is suffering this year for instance, I mean so there are pockets of strengths, and there are also pockets of concern. But, there is... overall, our budgets internally generated from our people are far more enthusiastic than I am and that's a good thing and most of that enthusiasm is based upon their knowledge of what they are doing with their local clients.

Thanks. And just one more question, on the follow-up on the net new business, any sense how January started off for the year?

Well, I think January is a net $500 million...

Yes,a little more than flat.

Other more...

Yes.

So...

It was very strong.

It was very strong, I mean the fourth quarter, if anything was an aberration.

Thank you very much.

Thank you, Alexia.

Thanks. And our next question comes from the line of Michael Nathanson with Sanford Bernstein. Please go ahead.

Thanks. One to John and one for Randy. I wonder John if you could just follow-up on the comments that you think France and UK was a quarterly thing, maybe a pull forward, versus any future signs of weakness or how do you feel about that, and how do you know that? And Randy, I wonder if you comment a bit about the buybacks, versus your cash dividend policy, you spend over $2 billion on buybacks, but $400 million past two years on dividends, on one end injustice ratio increased the payout and maybe attracts the new investors into the market looking for a higher dividend paying companies?

First, in terms of the UK and France, the UK, we have to watch that very closely like the U.S., it's probably UK, Ireland, England are suffering from mortgage crises and then a slowdown in their economy. So we are very... we are watching that very, very closely and we'll continue to do so. January's results for that month, which are not really indicative of anything, sort of are recovered in terms of our growth for January in the U.K. And France hasn't really suffered, I think it had to do with the impact of some businesses that we divested more than anything else, and their impact into our calculations. So I haven't seen any real slowdown in France per se.

You have to be very careful looking at quarters and thinking of them as a trends.

Right.

Last quarter, U.S. growth was less than international, I think, at least I heard from a number of people that they were surprised about that. This quarter U.S. accelerated and international slow down, which is probably certainly opposite trend of last quarter, and again probably different than what I would have necessarily expected in general. It always makes me go back to realize that excellent execution by the companies and timing of client spend, it really overwhelms the economy in general and have to look at these things at a much longer term basis, than quarterly to think of trends, especially, on a country-by-country basis. Going back to your other question, last year, I think in the second quarter we increased our dividend about 20%. I think while it's a board decision, I would suspect that will continue to increase our dividend, probably faster then our net income growth. I don't know, but I don't see as I certainly wouldn't recommend a dramatic increase in the dividend. We would prefer to be spending our money on excellent acquisitions, because when we make acquisitions on the basis that we make them they are very accretive for shareholders generate us a great return on capital, we would like to have the ability to do that. We can obviously adjust our share repurchase activity based upon sort of the immediate ability to make acquisitions, whereas if we dramatically step-up dividends, that's not something that we think we can adjust, certainly not downward on a moments notice, if the acquisition pipeline, it really builds up. So we are... I think we are much more of a consistently focused operating plan and again one or two years isn't a long-term trend.

Thanks.

Thank you. And our next question comes from the line of Troy Mastin with William Blair. Please go ahead.

Good morning. Thank you. I am curious if I can get some perspective on the nature of your new business wins that you reported in the quarter and maybe in each trends that are specifically, maybe the mix between domestic and international, marketing services, versus advertising, and then the engine room where you are seeing a lot of strength in new business, how does this compare in terms of the typical margin structure versus other more high profile wins?

I don't have the answer to the first question, that's not frankly analysis that we do. Certainly, in meetings with investors I have said it pretty consistently. We collect this net new business, wins data predominantly because shareholders or analysts seem really focused on it. We don't really think the numbers are great numbers for people to focus on, but since it's the demand for the data we try to supply it. We don't go through and cut it of and all of those that you ask for. One thing that we do, do because it just glorying the obvious, each quarter the net new business report is generally 70 to 90 pages long. If you think about our business a little bit we have about 2,500 agencies in about 120 countries. We are in a huge number of disciplines that we grouped together in these four categories. Once you get outside the United States and maybe a couple of other major markets in the world or multinational pitches, most of the net new business activity is relatively small, you get a few pitches each quarter that are big which are consolidations. Most of those that have big numbers attached to them are advertising centric that U.S. centric and lately with the consolidation in media, which is a lot of in a sort of moving deck chairs around a little bit. You get some perceived very large numbers that from a revenue basis are not near as impactful as some of these numbers sound. From an operating standpoint, the one or two large win or loses, well it's never going to loose an account and we focus on that tremendously, and it's always great to win those accounts. From an overall management perspective, the difficult challenge is that, that engine room is working everyday. That's hard to fix, it's hard to -- given applying if you had 500 agencies that works in the positive category, that's hard to turn around fast. That engine room for us is extremely consistent as it should be and very focused on its net new business performance around the world and that's been strong, that's part of the reason that we broke it out. That's really one of the major strength of Omnicom is really the breadth and depth of those agencies globally and the success and the consistency that they have.

Regarding margins on that engine room, do you have a sense there, they are meaningfully different?

I don't believe they are.

No, I mean, when you look at our numbers now, you won't see any difference. I think there is no consistency in the way these numbers get reported across the industry and if it was a gross media win, when we report our numbers, we reduce that all wins by 25% of what the billing is to be more reflective of a correlation between the revenue you might expect from the reported billings. I think we are the only one in the industry to do that.

Actually we do a couple of things from that front and it's probably worth noting, and I don't follow how the other people report net new business wins. I know that were somewhat different. First big difference is we'll have different mixes of business. So therefore on a quarterly basis the mix is obviously going to vary quite a bit. We report media only wins -- we take those media only wins and losses and we divide by 4. So we take 25% of the number and that's because the commission or revenue structure and media only wins...

Is three to four...

Is much lower...

Yes.

And therefore we try to get at normalize with I will say general advertising account or historic advertising account. In the other areas, we report what our revenues or our billions are for those accounts. So in something like PR it might be $1 million account, we reported as 1 million. I believe some of the other networks make adjustments to that divide through by 6.67 in order to try to do the same thing that we do with media which is get it to approximate the commissions structure or the old commission structure in advertising. I don't know for sure that everyone does that, but I think that's more than norm. So, we try to be conservative on both sides as a result of that I believe our subsequent revenue generation of our reported net new business number is generally a bit different. Yes, and I think when you look at our net new business wins in compared to our net new us wins, I think the numbers are very comparable. I would think the same thing for the other networks. I am not sure because of those differences both the way we report and our mix of business that they are really very comparable numbers from one holding company to another holding company. Again, we don't believe those numbers are great numbers for investor to look at, especially on a quarterly basis, long term trend are much more important.

And probably the most important element in this is we have, 2000 agencies out there and they are all hunting everyday.

Yes, that's my point with the engine room and that operating philosophy that they are hunting for themselves, as well as looking for the network business that combination creates a lot of consistency and frankly the culture inside the Omnicom network and agencies.

Hey great and then one more, moving on to the M&A environment with situation of credit markets and maybe some slowdown in the macroeconomic environment, how this is affecting your M&A strategy, have you seen some of your targets starting to come in on their expectation of the price and if there is anything specific by geography that's worth noting, I would appreciate that as well? Thanks.

Well the type of acquisitions that we are looking at are tends to be very specific. They are very consistent with the expansion of the business plans of our major strategic platforms within the company and they are well within the cash flow capabilities of the company to finance them. What we are seeing is there aren't as many people willing to pay foolish prices for things competing for deals, and so become -- the pipeline is pretty robust where people who believe by joining at Omnicom, they can grow those individual segments or their individual business faster, that's returning to the market place. It was absent for a while when you get our ideas of our pricing unless you walk down the street in some private equity, I would just blow the number up. Those guys are gone, so if there is any silver lining to some of the slowdown out there, it's eliminated a lot of these silly non-strategic buyers and we are looking very hard in the number of things.

And we will see how that plays out.

Yes.

Long term, a year ago it was in many cases hard get to almost the second round, because sellers had what we believe were unrealistic expectations, but frankly they were getting them and I guess that many of those deals, I couldn't really blame them, based upon the numbers that they could get people to pay. It appears that money has dried up. We will see if it stays that way.

Okay. Thank you.

Thanks and our next question comes from the line of Jason Helfstein with Oppenheimer. Please go ahead Jason Helfstein - Oppenheimer & Co: Hey, just one quick question, you guys have covered a lot already. Did you guys see any impact from the strike, I mean it does sound like this is going to get resolved soon, but was there any business impact and then just John, do you see any kind of just takeaway, so unless as people kind of reassess strategy not knowing how long this is going to go on and what... if you think there is any longer term impact to think from these banks?

In terms of our business, we haven't been able to pinpoint any specific reaction to the strike. We will see what happens and how fast they crank up and put new product on the air. Like clients are... clients find consumers and we are not married to any particular media. So we will find the consumers for the clients and so TV is only one avenue for us to accomplish that. Obviously, everybody is relieved that the strike is over. The long-term impacts, I don't you hear a lot of rhetoric about increasing reality TV and all the rest of it. And then, if you follow it closely, you will see the debt of reality TV too, because there is not so much more you can do to shock the American public. So I don't have any real long-term view, as to what the implications of this were. I mean Randy may have a...

Very couple, I mean I have a couple of interesting things. You saw things like the Super Bowl which obviously had great ratings, but it was also I think it was the largest single day, single event media buy in history which OMD did or agencies obviously in those kinds of events in this market were probably the importance of the more probably exacerbated, even further. From an Omnicom perspective frankly, of clients were moving some of the marketing dollars away from TV and into other marketing initiatives. That's generally a positive for us. We have much greater market share outside of traditional media advertising, than we do in traditional media advertising. So that's not really a bad thing, if that occurred. If it occurs, there's always obviously the question, if the worked for clients move back once like push them out change, or if it worked to stay where there were at. So, this may have accelerated even a little further in some of these shifts that will obviously play out overtime.

Let me get one follow-up and just, on the buyback to the extent that the performance of the stock in more recently put you in need of being a sweetener and who knows what is going to happen with the stock market in that six or nine months, as we move next bond, but does that make you take a more conservative outlook toward buybacks or it really relevant at the separate analysis?

Well, the first of all that Randy used the frame term $9 per bond. This is nine-tenths for people who are not familiar with bonds, its ninth-tenths of 1% we paid to borrow, to keep the money outstanding. So, that's a pretty good deal any day that you can get it. In terms of our own ability, we live within our cash flow, at least we have been certainly for the last five or six years of course, and we're able -- depending on the acquisition requirements, that what investors we want to make, we are able to utilize or not utilize our excess cash flow after looking at that activity for share buyback, and so it's a very fluid type of an analysis and it has to do with whether or not we are making other types of investments with that cash.

Okay. Thanks.

Thanks. And our next question then comes from the line of Craig Huber with Lehman Brothers. Please go ahead.

Good morning. Thank you. Just given a slower economic environment, can you just help us describe for us, what is it about your business more historically, has your company been able to grow organically, your top line to the last two recession, I believe your worst year was 2002, your top line grew 2.8% organically, your EPS grew 10%, sort of curious here, what is your business model you can do that through tough times and also can you describe this, if you would, your flexibility in the cost front? Thanks.

Sure. To deal with the bottom line first. There is a high proportion of compensation, which is paid through incentive income and then in order to receive that incentive income there is the employees, the agencies, the groups have to hit targets and objectives. So, when the business slows down their expectations for what they are going to receive based upon their top line growth also self corrects. So, that allows us to have flexibility in terms of what the net income and what the performance of the company is even in the toughest of times. In terms of revenue growth, we are a global business. Everybody is talking about the downturn, but downturn is the moment really the U.S. world where there is a housing market crisis and right now that is the U.S, UK, maybe Ireland, the rest of the world big countries Asia, South America are all doing very well in terms of growth. So, it's the balance of our portfolio, it's the attitude of those 2000 agencies and wanting to go out and get new business every single day, and we have a client base of over 5,000 clients. So and the largest client that we have is only 2.8% of our revenue. So there is a lot of conservatism in terms of the product mix, the geographic spread, and when one market isn't growing, another one generally is. So it allows us to continue to grow, plus we stay very focused on our costs, and make certain... we don't hesitate to act if there is a decline in a particular market or particular account.

And you can't overestimate the power of that culture, the depth, and the quality of the financial and operating staff down to our agencies I find incredible and their consistency. Their focus on growing the business and not sitting back and trying to look at the overall global economy is some macro excuse obviously, they have a concern about it, but they are dedicated, their people are dedicated to growing the business and they realize new wins, new clients overwhelmed and economy. It may make it harder to get, but it means that they have to go out and work harder and generate those revenues to keep their people happy and keep their business growing. So, we really have to give a lot of credit to that depth and breadth.

Then also, two other nitpick questions. In the past, you've been avoiding to give some color on two small businesses here in the U.S. One a help wanted recruiting business and also Yellow Page agency business, I was just curious what the percent change in the revenues for those two businesses were?

Now they were, I don't know about the percent change. They were both negative organic growth in the quarter.

Right.

There wasn't a major turnaround in either of those businesses. We've got to say the recruitment business is a very good business, domestically I think it's the leader in the space, it's a both of thought leader and a market leader, the Yellow Pages business I don't think I could necessarily give the same accolades to.

But, these are where somebody looking will see in through in the second week and get you an answer. These are very small businesses, and I think when we refer to them in the past, we are talking about the impact they had on our specialty advertising category, which is also relatively small, so it... they are not big numbers.

Certainly not big numbers from an operating income standpoint.

Right, not from... right, exactly.

They are both relatively low margin businesses, as I pointed out before the recruitment business is probably our most economically sensitive business.

Yes.

It has fairly substantial market share domestically and so obviously, tied want to the economy obviously, there is also significant shifts in that space overall, which I think they've been a thought leader on and trying to change. Moving to online recruitment, there is various technology initiatives going on that are automating or streamlining many large companies, recruiting processes businesses like Career Builder and Monster etcetera, changed the business. The Yellow Pages business is a whole industry that's been changing, quiet dramatically going from a paper business to really what I think people described as a local search business, which is sort of combination of electronic tied with search marketing, online Yellow Pages, mobile search, mobile marketing, as well as print. So well, I don't see the print business going away soon. You certainly see necessary for integrated capabilities, and this business is probably not as far a long. It's certainly not been the thought leader that our recruitment marketing business has been. We will see how that one plays out.

And then lastly, if I could just, concerning CapEx. I know it is up about 25% this year, what should investors model for this upcoming year, the higher or the lower number or sort of in between?

Let's say, probably a little bit lower than this... what you... is this probably two drivers to that. The increase over our depreciation and amortization number, there is a couple of drivers to it. The first big driver is the number of office relocations, because whenever we have an office relocation or the release of, I will say a significant office space, there is a generally a relatively sizable CapEx number associated with renovating or building out the office space and upgrades in technology platforms. So this year we had two or three substantial office relocations, large 200,000 400,000 square foot facility, we've got redone and those tend to spike these numbers around a little bit. We also, if I had mentioned before, we have historically done the vast majority of our, I'll say technology in our PC servers etcetera, on an operating lease basis, and we've changed some of that philosophy to move it from operating leases to capital leases, which really have no impact on our net income. Yes we want to get the most favorable financing, best return on investment for our shareholders, and we think this is... and again that movements maybe $10 million or $15 million, over the course of the year, so it's not substantial, but there is some shift.

But you reduced the number a little bit low than 07, is that what you are saying?

I think, it will be little bit lower than 07 because of the office shift that I know of right now. I don't know where in a... I can't say top of mind I know every office relocation. We have about 1,100 leases around the world. I know we have people and focus on them, I can't say that I know every single one that's coming up this year, top of mind.

Shame on you... thank you.

Thanks. And we have a question from the line Karl Choi with Merrill Lynch. Please go ahead.

Hi, good morning couple of questions here. One is regarding your comments about acquisition evaluations becoming more reasonable, just wonder if that's extends to digital acquisitions as well? And second question is just wondering if we do hit, most of the year slowdown, how would you think PR will hold up this time. It didn't really has disciplined and hold up well quite well in a last down turn, just wondering what your thoughts are? Thanks.

Digital acquisitions also become more reasonable as well. And in terms of PR that business model has changed quite a bit, since the last recession, there is of lot more on line activities. There is a lot of interactive in terms of what important parts of that business are, so sitting here today with the client base that our PR companies have, we don't see any reduction or cutbacks. There are companies of forecasting, obviously we watch our forecast on a monthly, regular basis, and when there is a change we take action, so I don't have anything.

And also if we look a little bit at the recession, at the last rescission was following 9/11. I think there was a not a lot of interest on company's parts to really be focusing on PR, sort of in that environment people weren't getting past the funds action in newspaper for a number of months, to be worried about new product introductions and some other thing. Also at that time the business is, in that new product category were large and there is a big honk and that was tact focused, obviously that was, while that was an overall recession, may be starting out of 9/11 and some of that, there was a big reduction in the tax factor. So, each time, it's a little bit different and as John pointed out our PR businesses, I think are very broad based, obviously extending their disciplines into a lot of the new technology which certainly made the business very exciting.

Great. Last question, on free cash flow usage, it sounds like you are signaling that maybe you spend a little bit more on acquisitions to extend that variation's workout. Should there be a sort of minimum amount of share buyback that we should expect?

I think we'll still have strong share buyback, we don't really put a number on it. We've had pretty good share buybacks already year-to-date where the stock price has certainly been at and we don't normally spend a lot of time focused on just doing it because of share price at these share price levels or multiple levels.

We believe it's a good investment.

I mean it's hard to sit back and ignore it.

That's good to know. Thank you

Thank you

Thanks then we have question from the line of Catriona Fallon with Citi. Please go ahead

Yes, hi. Good morning, gentlemen. Could you ever discuss Randy, the extent of any headcount reductions due to the changes in the Dell and the AT&T account?

They were all taken care of in the fourth quarter.

I don't know what the numbers were.

I don't even know what the numbers were either, to be perfectly honest with you. So, Dell is not that significant because as many of you might remember we had reported in earlier quarters that BBDO had lost part of the Dell account. So, we had made adjustments throughout the year on that and in terms of AT&T, there was a the business that we lost there was the wire line media business. The wireless business, which was the largest part of that media count was a BBDO account, I mean a WP account going into the pitch. So, they retain that part and they took away our wire line piece, which was a declining business to begin with in GSD&M in Austin, Texas made their reductions that it felt needed and it is since come back in one other businesses and replaced some of that revenue with other clients and the only game in Austin. So, they retained as many of the people that they possibly could.

Okay.

Some of the markets -- these were account consolidations of which we had pieces. So, certainly the market news about the win, well we would have loved to have the win because it would have then expanded our business. The piece we lost, was far smaller than the totals that we reported. As John pointed out, the BBDO in the second quarter, BBDO elected to take on business, I believe was a best buy and that was deemed to be a conflict.

At the time.

At the time, and so they walked away from the Dell business in taking that business. So, that was reported earlier in the year.

Right, okay. And, then can you just discuss a little bit the seasonality of revenue, I mean specifically with the Olympics, I mean Q3 has typically been kind of the second lightest quarter and I am wondering with the Olympics this year does that make Q3 perhaps not as seasonally light. And, then just a follow up on that, what's the opportunity you are seeing in Asia Pacific kind of post the Olympics, is this accelerating opportunities there and then I guess last question would be, are you seeing any impact or change to the business due to the HD conversion that's going to be happening in 09? Are advertisers looking for anything different in the way their advertising due to the HD conversion?

I will deal with the last one first. No, I mean that's... its change is constant. So, there is no specific effort associated with every American has to have an HDTV in 2009 and 11, seem that is some thing everybody is highlighted.

That may increase peoples focus on maybe production quality or is there something I don't around that.

The Olympics question.

Yes.

There is a lot of build up to the Olympics, what a lot of TV production, a lot of activity occurs prior to the actual games themselves, what happens in the games is a lot of events and promotions that go on in that quarter. These numbers are helpful, but they are helpful on the margin, alright. We are large diverse companies, as I just tried to indicate before, our business is spread over 2,000 agencies around the world and our larger single client accounts for 2.8% of our revenue. So no one event is going to move that need all that much. I think what the Olympics, what the elections, what soccer in Europe help is any mitigation that you have because of any down... decline in the U.S., it will help decrease those headwinds, but I don't think we are projecting big strikes in the third quarter at this point.

Yes, I mean there are couple of things with some of these movements. There aren't too many companies that I have heard that will come out and said, It's an Olympic year and our net income is going to way down because we are going to spend a lot more money in marketing. So again, there is some movement around. The Q3 question that you asked, generally our smaller quarters are Q1 and Q3, if you think through the year little bit, I mean we are largely a services organization and well we have a lot of different revenue models, a lot of it boils down, these days to labor hours that you are consuming. So when you look though the quarters, thinking the starting point there should all be flat, you have kind of a January affect in Q1 which brings those numbers probably down a little bit from a norm and in Q3 you have an August affect, especially in Europe and starting to become more and more in the United States, so there is a lot of vacation time in that month which bring those numbers down a little bit. So on a natural bias, those two quarters are generally a little bit lower with Q3 and Q4 being higher. The way contracts are being done, there is some smoothing, versus our historic revenue patterns, so over the last few years, we have been seeing a bit higher organic growth in Q1 and Q3 versus Q2 and Q4 windows, trends smooth out, not sure, but, I think there is a little bit of a natural bias that Q1 and Q3 should be a little less than Q2 and Q4 on a long-term basis.

Right, thank you.

Thank you. I think we are about out of time. So with that question I think we are going to thank everyone for their time, and we will talk to everyone over the course of the quarter. Thank you very much.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.