Operator: Your next question comes from Tim Nollen with Macquarie. Please go ahead.
Tim Nollen: Hi. Great. Thanks very much. I feel like I’m going back many, many years with this. But could you please remind us what your organic growth calculation is, i.e., your organic growth in the quarter, obviously, your organic growth, does that include Flywheel’s organic growth as well? And then when does it become part of your reported growth? Is it 12 months after? I think that’s right or do you actually go a full year after it has been already integrated? Hope you understand that question. Secondly, also, I’d like to just to ask another Flywheel-related question. Your branding and retail commerce number was down, I think, 3.8% organic in the quarter. I think you pointed to particular items on the branding side. I’m just wondering, if there is any Flywheel business in that retail commerce portion? And then tying back to the first question, if there was organic growth there. Thanks.
Philip Angelastro: Sure. I’ll start with the organic growth, Tim. So we’ve always done the calculation consistently. So when we do an acquisition and in this case, Flywheel, we spent over $800 million of capital to acquire the company. We’re responsible for the results, and we’re measured on the results post-acquisition. So included in the results is Flywheel’s organic growth. The acquisition revenue number reflects their prior or in the calculation, the acquisition revenue from the prior year is used as a measure to determine what the growth is based on the current year’s revenue. So you take the current year revenue and compare it to the prior year revenue, if it grew, it’s part of the organic growth. If it’s negative, it’s part of the organic growth.
We’ve never excluded acquisitions from that calculation. And we don’t see why you would exclude them for the first year in any way. I think we’re responsible for the growth as part of the calculation. So we haven’t changed the calculation and how we go about doing it.
John Wren: So Tim, so explain it – just another way to look at it is that Flywheel did hypothetically 102 this first quarter and last year before we owned it, it did 100, the 2 would be an organic calculation not the 2, just the 2.
Philip Angelastro: Yeah. It was 104, they’d be negative 2 of organic growth
John Wren: Correct.
Tim Nollen: All right. It’s been a long time since you’ve done an acquisition of this size, so I’m forgetting how you do the accounting for it. So thanks for the explanation.
John Wren: Yeah. I know. The one thing you count on, Tim is, I’ve been here longer than you, and we’ve always done it the same way.
Tim Nollen: Consistency. Thanks. And then remind us again relatedly then, when does Flywheel become part of reported growth, not acquisition growth as an organic reported growth, not acquired growth?
Philip Angelastro: So it’s in the reported growth and the incremental growth over the prior year, the 2 in John’s example, that’s what’s on the organic growth line.
Tim Nollen: Right. And then…
Philip Angelastro: The balance is on the acquisition line. So on the acquisition — if you’re looking at the chart in the presentation, the acquisition revenue is the 100 and the organic growth number is the 2.
Tim Nollen: All right. And then is it 12 months after acquisition that there’s no more acquired revenue from the company. It’s just all organic?
Philip Angelastro: Yeah. That’s correct. Yeah.
Tim Nollen: 12 months after acquisition close, okay.
Philip Angelastro: Yeah. It’s one year. Yes.
Tim Nollen: Okay. Great. And then lastly, on the retail commerce proportion of the branding number, is there a Flywheel in that or is that all in Precision Marketing.
Philip Angelastro: Yeah. All the Flywheels and Precision Marketing. We are trying to split up an operating company between disciplines is certainly very challenging and especially Flywheel’s business.
Tim Nollen: Got it. Okay. Perfect. Thanks so much.
Philip Angelastro: Thank you.
Operator: Your next question comes from Steven Cahall with Wells Fargo. Please go ahead.
Steven Cahall: Thank you. So John, with the removal of the lower end of the guide, the way you talked about it, moving to the 4% to 5%, is it fair to say that the year is off to a stronger start in terms of what you’re seeing in client activity or is it just that it’s off to the start you kind of expected and that has removed some risk and so that gives you that confidence to move up the range a little bit. And maybe within that question, I think in the prepared remarks, Phil, you mentioned that Advertising and Media was solid and media buying was called out as the piece of that. Creative is obviously still a big business, and I think it was a little choppy across the industry in 2023. So it also just look to understand if there’s any inflection points or trends in the creative part of that business? Thank you.
John Wren: I’m I didn’t write your first question down, sorry. Repeat the first one, I’m sorry.
Steven Cahall: Yeah. I’ll break it into two, it will be easier. So the first one is, just with the change to guidance. Is it just that things are kind of performing in line or are you actually seeing better client activity than you expected early on?
John Wren: Well, things are in line for certain. And things are — certainly things that we expected to grow are growing. And so the confidence is every week passes just gets more reassured as we go through the year. And at this point, looking at the new business activity that’s in front of us for the next several months, we’re defending very little at this point, and we have opportunities on quite a number of big brand names. And if our batting average holds up, as we go into the future, we’ll take our fair share of that, which won’t have too much of an impact as we get later in the year in terms of ’24 numbers. But overall, it helps the health of the business, our confidence. And it will certainly give us a wind at our backs for next year as we move into the end of the year and into next. So all the signs at the moment are very constructive, and we’re making a lot of progress on a lot of different fronts.
Philip Angelastro: So your question on creative versus media creative this quarter was roughly flat. We expect the rest of the year to improve in the advertising — creative advertising agencies. It’s still core to what we do, and it’s really Omnicom’s DNA. It does go beyond — creative does go beyond advertising though. And there are certainly very different agencies than they were just a few years back as they continue to adopt new ways of working using current technology and some of the things we talked about, and John talked about on his prepared remarks, in terms of the content supply chain, etc., they’re a big part of that. So we’re optimistic that they’ll be in a growth mode as we go through the rest of the year.
Steven Cahall: And Phil, could you put that roughly flat just in the context of whether you think that’s an industry trend related to macro or — and/or technology or is any of that related to account wins or losses?
Philip Angelastro: I think it’s probably a combination of each of those just even though it’s a lot of different things, but there’s certainly been a lot of change in those businesses recently. And I think we’re probably not that much different than anyone else.
Steven Cahall: Great. Thank you.
Philip Angelastro: Sure.
Operator: Your next question comes from Michael Nathanson with MoffettNathanson. Please go ahead.
Michael Nathanson: Thank you. Following up on Steve’s question about creative. Can you talk a bit about Gen AI and what you’re doing on the creative side? What have you learned? And is there a risk that as these tools get more sophisticated, it could be cannibalistic to your creative service businesses. And maybe it becomes more efficient for other people to do it or new entrants form? That’s one. And then two, Phil, can you talk a bit about the capital intensity of Flywheel, you mentioned a little bit of higher CapEx down the road. How much more capital intensive is that business than the rest of Omnicom? Thanks.
John Wren: Sure. I’ll start your answer. Now with respect to technology and the advertising sector, and then, I might ask Paulo is working most closely on AI has joined with us today, if he wants to add anything before Phil gets to answer. The single largest benefit of generative AI as we’re using it is it makes it simpler for highly creative people to come up with different executions, different applications of their ideas across many different mediums and using the specific Omni data that we have and Flywheel commerce data to help understand where the consumer is and the messaging that we have to create in order to reach that consumer. So as this goes forward, automation affects every single part of the business, AI will affect every single part of the business and the programs and the things that we’re doing are to take that on board to evaluate and shift up as a market leader and even in advance of testing things that are available or hopefully will become commercially available at some point in the future.
I guess if there’s a downside to it, it’s a lot of the things that in the past might have been done manually and somebody got paid to do that execution work, which was typically pretty boring and repetitive, that gets eliminated. So you’re not seeking to hire those level people to do that level of job and therefore get reimbursed at a profit for them. But what you are doing is, you’re able to come up with better, cleaner, sharper ideas, which can either succeed fast or fail fast. And all that at the end of the day, benefits the client and makes the ROI on a marketing dollar spent greater. And that’s where I think the contribution of generative AI is going to come in. And it’s been my experience over my career, the more clarity I can bring to a client and explaining what the ROI is on the next dollar of marketing he’s going to spend or she’s going to spend means that we probably are going to benefit from that in servicing in some fashion.
So philosophically, and there’s a lot of moving pieces that are going on all the time and have been for quite a while now. But pretty intensely, adjusting to and exploiting where we can, those the things that generative AI does. But Paolo, who we’ve met before in previous calls, I think is really the guy that I depend upon, among others on this, and he works very closely with all of our suppliers and vendors. Paolo?
Paolo Yuvienco: Yeah. Sure. Hi, Michael. So look, I think you’ve heard us talk about this in the past that we really believe that generative AI strictly is going to empower our people and really give them super powers for the skills that they already have. I think we look at it through the lens of a maturity model with respect to how they are executing their tasks. In the recent past, generative AI has really just been a tool. Today, it’s more of an assistant or co-pilot, if you will. And really, tomorrow, it becomes a true partner, whether it be a creative partner, a strategic partner, planning partner for every one of our employees. So that is effectively how we’re approaching it and how we’re building it into Omni to provide that partner for everyone.
John Wren: And it’s a much longer conversation. But if you think through the technology, if you’re in a competitive industry and the tech is way further than it is today, the competitors simply ask the same questions to reach the same consumers. They’re all going to get the same answers. So it’s not going to differentiate anybody. What brings the difference to this is the creative minds that we’re able to attract in Omnicom and apply to those client challenges and objectives.
Philip Angelastro: And your second question, Michael, similar — how intense is the CapEx commitment similar to the Omni platform, we need to continue to develop the Flywheel Commerce Cloud platform, and we intend to do that certainly with Flywheel and lead. But in terms of scale, while similar to Omni, we expect an increase in CapEx spend. But we wouldn’t say it, we expect it to be dramatic. It’s going to be an increase, but a very manageable increase because as we said before, Flywheel went through a significant period of time, probably 12 months to 18 months to integrate its back end platform or platforms, some of which are part of prior acquisitions into one integrated Flywheel Commerce, call it, platform. The vast majority of that work was done prior to when we announced the deal in October of ’23.
So most of the work at this point going forward, similar to Omni is on building enhancements, incorporating new technology and keeping the platform at the leading edge. So we don’t expect it to be dramatic, but certainly, it’s an investment that’s well worth making for us.
Michael Nathanson: Okay. Phil, can I ask a quick one on the add back of amortization, I understand the intangible amortization. But what was the thinking on the internally developed strategic platform asset amortization. So that’s — so how is that — why did you guys include that in the EBITA definition versus pure amortization from goodwill.
