Digitas Meets Numbers, But Lowers Outlook

Even while its second-quarter profits were up 14 percent, Digitas reduced its financial outlook for the second half of 2006, mainly due to troubles at some of its top clients and the loss of three smaller clients due to what the company is calling isolated failures in execution.

Three smaller clients, none top ten spenders with Digitas, were lost in consolidation moves this quarter when their needs were not being met by Digitas, according to David Kenny, Digitas’ chairman and CEO. Best Buy, Ameriprise, and FedEx all dropped Digitas to consolidate their creative and media buying elsewhere. The three accounts combined made up less than 15 percent of Digitas’ fee revenue.

“We’re clearly disappointed that we haven’t executed as we should have in these cases,” Kenny said. “We were under-serving these clients, and they found solutions to get things done quickly elsewhere.”

The losses were due to retainer-based projects not being completed in a timely manner, partly due to lack of resources dedicated to the projects and partly due to mismanagement, Kenny said. He called these losses “unacceptable,” and said that several senior employees had been terminated as a result. Kenny declined to give specifics, but it is believed that all three accounts were handled from Digitas’ Chicago office.

“This is a high-performance company, in a fast-growing market, with exciting and dynamic clients. Our people really need to be in the game,” Kenny said.

Digitas’ relationship with its largest client, American Express, remains “rock-solid,” Kenny said repeatedly during an investor call Tuesday. Digitas has also embarked on a plan to diversify its client base, to minimize the impact of struggling clients like Delta and GM, as well as client losses.

The Boston-based interactive agency has not seen the growth it had planned for from some of its biggest clients. Trouble first surfaced when Delta Air Lines, a client of Digitas’ Modem Media subsidiary, entered bankruptcy last fall. The next client to share its troubles with Digitas was GM, which is continuing in a sales slump, which results in fewer ad dollars to spend on extra projects with Digitas.

To get the most out of the relationship on both sides, Digitas has been working with both clients to improve operational efficiencies, and to come up with innovative ways to get things done faster and with lower-cost labor, Kenny said.

“Our highest efficiencies come when both we and the client change the way we do things and take steps out of our processes,” Kenny said. “There’s a great operational advantage in being a leader on the efficiency front.”

After the bell Tuesday, the company reported net income of $13.5 million, or $0.14 per diluted share, for the second quarter of 2006, up from $11.9 million, or $0.12 per diluted share, in the prior-year period. Fee revenue accounted for $100.5 million of the company’s $190.9 million for the quarter, compared to $87.6 million in fee revenue and $134.3 million a year ago.

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