Stagwell Inc. (STGW) Earnings Call Transcript & Summary

Okay. All right. Thank you, everyone, for coming today. We're here with Stagwell Group CEO and Chief Investment Officer, Mark Penn and Jason Reid, respectively. I'm Rob Patterson. I help to lead our marketing service and technology practice at Morgan Stanley on the banking side. We're delighted to have the team here today.

So Mark, why don't you start with some -- a few sort of high-level, more descriptive talking points around Stagwell? It is -- despite your massive scale and growth profile, the story still is below the radar of many. So can you just describe Stagwell and the platform and your strategy?

Well, look, I think as we announced, we hit, as you said, $2.7 billion of revenue. Coming on from a founding in 2015 with a vision that we were going to create a digital-first challenge or marketing company, that the majors have been there for so long, were behind the times. Digital transformation was occurring so rapidly that there was space for this kind of company in the marketplace. And so that's what we did, and we systematically put together the performance marketing services, the research, the digital transformation, the engineers. And then we went ahead and we merged to bring together the creatives so that today that we've got, I think, really the best in this combination of talent and technology in order to provide modern marketing services and yet, at the same time now, we're taking -- I came out from Microsoft as Chief Strategy Officer. Steve Ballmer was our core investor. So when you say you're marketing services and technology, we are marketing services and technology, right? And we're really -- I think people are beginning to see how we're bridging from the digital-first services into the pure tech world as well.

And how is your approach when you think about this ecosystem? Because it's obviously evolved quite a bit over the last decade. You have the large holding companies, the Omnicoms and IPGs of the world. You have other folks like Deloitte Digital and Accenture Interactive or Song coming into this ecosystem a little bit, some through creative acquisitions, other a lot through technology services. How do you think about your competitive set today and the differentiators that Stagwell brings to the equation?

Sure. I mean I think, look, we always view that the big holding companies were too heavy in the legacy services. And so their problem was how do you get over to the digital-first services and then really effectively combine them. And then we always thought that the Accentures of the world had too much digital transformation and engineering and not enough creativity. So we really set out to be the Goldilocks company that had the right combination of -- we had 5 or 6 ads at the Super Bowl. We had the Ben Affleck ad. We had the NFL ads. So we had great representative creativity that was one of a kind. But really, most of the company is technology-based marketing. And if you really want to be effective at marketing, you can double your effectiveness and creativity. You can double your effectiveness with the right targeting. You can double your effectiveness with the right research, and that means you can basically have an 8x better marketing campaign, if you can put all of those things together in the right way, and that is our USP.

Yes. This question of the evolution of the sector leads me to a different topic, which is the role of the marketing services agency in this big world of digital. The technology and media ecosystems continue to evolve, and they're incredibly complex. And that complexity seems to only compound over time. You have now connected television. You have the metaverse. There's always new media ecosystems to live in. And with this, the agencies themselves, many histories have been written about the death of the agency, yet if you look, especially in the last year, these companies continue to thrive and play an integrated -- or integral role in this ecosystem. How do you think about the role of the trusted partner agency whether that's digital agency or other in the evolution of the marketing stack over time?

Look, I think it's a -- I think the marketing partnership used to be at the business strategy level, right? And I think, obviously, we strive to be a business strategy partner. But a lot of the partnerships today are at the, right, the combination of the data, technology and creativity, where the CMO really has to say, well, I was trained as a CMO. I've got a CIO over here, not your kind of CIO. And I've got to put these 2 stacks together. I've got to have a whole digital infrastructure. I might have a banking product, which is now 100% online but has regulatory concern. So really putting all those things together is now part of marketing, right? That is pretty far removed from Madison Avenue kind of Mad Men type marketing. And sure, is there still a tremendous amount of creativity? Are we still doing a great job at the Super Bowl and other tentpole events? Absolutely. But the relationship now here really has to be one of incredible effectiveness that combines the new ways to reach a customer. I always illustrate, I say, look, take a product like diapers, okay, or a product like Coke. If you're a product like Coke, go out and do the Olympics and major tentpole events because you're marketing to 150 million people. If you're selling diapers, there are only 4 million women giving birth in America in a year. 1/3 of them already have a diaper supplier from their previous child, and so you're only marketing during several months to a 1% segment. That's going to be digital-oriented marketing. You can't afford to go on television anymore. And that means having good data, good early warning systems, finding people, getting them the right stuff at the right time. And that creates a whole new level of relationship with marketing services companies that just simply didn't exist.

And you bring up an interesting point, which is, especially in a world of digital, performance marketing is just an integral part of any strategy. If you look back in the history of performance, it's usually been this long tail of advertisers, the smaller advertisers who are using Facebook and other places across the ecosystem to very efficiently and effectively target consumers. You guys have a client base, which obviously skews more towards large enterprises, large brands. How do they think about the world of digital marketing where performance marketing is a really integral part of that?

Well, I just think it's a new world for them. Look, when I was doing advertising at Microsoft, I had a $2 billion budget, and we would do 70%, 80% of it on television, and our digital ads would be like get Office 365. Now you see the whole kind of ecosystem and time and energy has changed in the sense that a marketer -- a modern marketer has to look at the digital ecosystem performance. Okay, now are you selling laptops directly? Are you driving people to your site? Or are they getting information that way? Are you really, in fact, now through your marketing, no longer just sending people to brick-and-mortar stores, but doing 4 or 5 other things along the information path that people flow? So it's just a totally, again, different world that, frankly, we're built to handle. Our companies come out of a history of performance marketing. The larger companies come out of a history of brand marketing, right? And so with brand marketing, you're essentially getting the name across, hoping then that the customers show up in the stores. In performance marketing, you're actually delivering the customers, whether it's seats here at the conference, whether it's tax returns filed for H&R Block, whether it's new investment accounts open for a bank or brokerage, you're actually now able to complete the whole transaction. That's why on our advocacy fundraising we raised over $1 billion in the presidential campaign, right? We market and deliver the results, and that's something marketing companies really didn't do before.

So I'm taking some notes. And when you think about this year, obviously, people have sort of entered this year with a somewhat muted view on outlook just given the macro picture. Do you think that in a world where people are much more careful with their marketing dollars, that performance is going to play an even bigger role when you look at the bigger brands?

Well, look, I think when a CFO says, let's cut the marketing budget, right, they used to be able to just cut the TV budget and say, okay, well, that saved us. But when they cut the performance budget, they're actually cutting their own revenue. So it doesn't necessarily make sense to cut the performance budget in the same way. So you have to look at it. Well, can I really cut that, but then I'm going to give up this revenue and does that really make sense? And so I think that kind of creates, again, a whole different kind of decision-making rubric here that companies have to get used to. Look, I think this is going to be a good year for marketing, but I think a lot of things layer up for us, particularly into 2024. In 2024, we're going to have, again, I think the biggest political races in history probably on top of the market and we'll also be, I think, in market with a substantial number of our marketing cloud products. So I think this is a good year. People are cautious. They don't quite know how the economy is doing. We've seen travel come back big time. We've seen experiential marketing come back big time. You're all sitting here. You're not on Zoom, right? So that means that element of the business, as you can see, is coming back. And I think tech companies are -- I think they did some cuts, but I think they're going to come back pretty strongly because now with AI, AR and basically new technologies developing and EVs coming, none of them can afford to be left behind. They've got to focus their energies. And so I think that after this kind of little pause period, you're going to see some energetic development within the tech companies. They have to.

So a few different topics that you bring up that I want to hit in on. First is you mentioned the Marketing Cloud. And what I would ask you is, as a technology-enabled services business, how should folks think about the Stagwell Marketing Cloud? And then on a similar vein, when you think about data and helping clients harness data to power their marketing campaigns, how does -- where does Stagwell fit into the broader data?

Sure. I think you have to look at Stagwell as covering the waterfront from global full service all the way down to tech-enabled self-service and SaaS platforms. Obviously, I always came with a very strong technology bent coming out of Microsoft and Steve Ballmer as our core investor. But I felt that when you have a digital-first services business, when you have 4,000 clients, when you have $5 billion or $6 billion of media running through your system, you could, at much lower cost, develop these tech enterprises. And these are full SaaS tech enterprises, make no mistake about them, right, for far less money, right? And within an ecosystem here that's incredibly supportive around the experts and the engineers and most importantly, clients I can go to and say, "Hey, we have a good track record with you on this. Take a look at that." And when it comes to really data, right, so it's -- we're in a very important intersection of being able to have their data and combine it with the data that we can get from consumer interactions. And our own data platform that we get, our proprietary data that we get from the survey companies that do millions and millions of surveys a year and the people platform that really aggregates location data across thousands of apps. And so we bring together our proprietary data with available third-party data with the first-party data. And on top of that now, we can increasingly layer AI to utilize that data and pinpoint how advertising should be created. When you look at how we're going to layer technology over what we're doing in the survey field, I think it comes into analysis. We're releasing in beta already our generative AI product that will create the news release for you and then determine how the news release is likely to do so you can play out the entire scenario before you've released it until you get to a point that you're satisfied and have a maximum opportunity of success. And you're going to see in research, we're going to do that in the analysis side; and with data, we're going to do that on the media placement side.

And just back on the Marketing Cloud. I think one of the key question marks that service providers, and this goes for everybody from the big consultants through to the agencies have is -- friend or enemy or frenemy in some sense with some of the software businesses, when you think about your own technology platform investment, how do you think about build versus partner versus, et cetera?

Yes. I think first, in terms of building it, we've primarily been builders, but we've made in the last year some key strategic acquisitions in areas we thought we're missing. We think the survey platform we bought is second to none in terms of being able to do professional research on an automated basis. And that as we kind of, again, also utilize the Harris brand that we have increasingly successful, we'll be able to win a significant share in the marketplace with that platform. We think we're going to win a significant share in the profit platform as well, and we think we can go into the media buying space. So there are 3 principal spaces that we think that we can carve out good market share. And it's -- the analysis that I looked at in terms of our clients and worrying about self versus full service was don't worry about it, that big clients with big needs and complex systems will need full service. They will want the assurance that you've got, a fully scoped out tech platform that's really engineered to run things well. And the biggest clients will have divisions that they believe should be self-service. Maybe they sell a product in one niche market where it's a lot easier to find the customers or why should they be involved in a whole full service global operation, when they could pick off 5 or 6 or 10 brands that could use a self-service product. I believe our credibility that -- I believe that they're essentially the same clients, and they will only be extending our business through this process.

Makes sense. Last topic on just the business model and so where you're heading, so political, obviously, it goes back to even where you got started many years ago in and around the polling space. You guys have some great platforms in and around political. How do you think about that business? Obviously, presidential elections happen every 4 years, congressional every 2, yet it seems like we're in a hyper-politicized world these days. When you think about the performance of that business and the revenue streams, how should folks think about where you guys have exposure and your role in and around the political cycles?

Sure. We provide ex advocacy numbers because I realized that nobody could possibly figure it out otherwise. And so you'll see that there's an alternate 2-year cycles that have come through. We think that the rising gas prices and food prices put a crimp on low-dollar donations this year. We don't think that's going to be evident in the presidential year. We think that this is going to be an incredibly strong presidential cycle because it's a 50-50 country. Look, so we are in the fundraising space. We're also in the political advertising space and political strategy and polling space and so we're on those different sides of the marketplace. And I think that we're going into really -- on my commentary side, I always say that we're going through a Nixon, Carter, Reagan cycle. It doesn't mean necessarily the Republican is going to win, but it means that after 2 elections where the country couldn't figure out where it was going, it really kind of is going to be all out and figure out where it's going. And so I always used to say when I was in the political business that they spend far more money marketing a hamburger than we did on politics. And now probably it will be $10 billion, $12 billion in politics minimum in the presidential cycle. And so it is going to be a very significant and important industry in this country, I think, in 2024. And I think it's going to have a big impact. And I think people are going to be motivated to give low dollar donations, which is something they really didn't have a tradition of doing. And from our service point of view, politics eventually will level off. I don't think that's going to happen in 2024 and -- but then we'll utilize the digital marketing skills, I think, that come from that into other related areas, nonprofit fundraising, other countries. I think we have a long way to adapt the learning from politics into commercial nonprofit and other countries.

So maybe pivoting to -- back to your earnings and the guidance. You guys have obviously delivered best in category growth since merging and going public through the merger with MDC. Guidance this year on a total revenue basis is 7.5% to 10% top line growth and 10% to 14% on a normalized ex advocacy basis. You've seen some of the larger holdcos in that sort of low to mid-single digits. What are you guys seeing from clients as you head into 2023? And what do you think the mindset is around their approach to spend and where they're focused in terms of allocating marketing dollars?

Yes. I think that -- I mean, generally, what we've seen some clients is we've seen some tech companies who pulled back because they've cut off -- they cut a lot of people until they kind of reformulate who's in charge and what they're greenlighting. But we've seen that before and the tech companies tend to come out of it. We're really seeing a strong pitch season. I mean, usually, when you see marketers pull back and are tentative, the first thing they pull back is all the pitches, and we're just seeing a normal to above normal flow in the pitches right now. And I think all the marketing companies are reporting that. And we're seeing, particularly, again, focus on this media and this combination of creativity and media. And why is that? Because when you look at where the greatest disruption and change in marketing is and where people are having the most trouble figuring out what they should use, it's with all these new sources of media. What's the best engine and team that could really be effective on our behalf? That's why we're seeing the largest kind of, I think, feedback in number of pitches in that area right now. Every time we go to a client and we say, okay, we're really going to combine this digital engine to the kind of creativity and brand that you want, it just clicks in and is an enormous business getter after, I think, the big holdcos really spend so much time dividing it, it's hard for them to have that kind of agility against, I think, the emerging client needs. And if you look at our growth rates compared to theirs, again, as I tell people, it's simple, I've got 57% of my business in online research, paid performance media and digital transformation. And they grew from me combined about 30% last year. So even with a slowdown in that, I think that I feel kind of able to meet the numbers that we projected for this year.

And you mentioned this on your call, but this ability to combine either creativity or technology and media is a really critical part. You mentioned holdcos do have obviously big operations on both sides. What is it about Stagwell where you're able to merge those capabilities together and bring best-in-class sort of the combined service levels to us?

I think the philosophy I had was one of collaboration, not competition. And so part of the problem with some of the other holdcos that had gotten so big is that internally, the way they are established was really a number of competitive groups each with their own spheres. And so collaborating and working together was really difficult for them. I've really emphasized that from day 1. It was one of the things I tried to take what I liked and what I didn't like from how I saw these other companies were organized. And so I think that gave us greater agility to create a creative media consultancy and to bring these skills together. We've now created the brand and performance network where we've taken a lot of headliner creative agencies, put them together with the media companies, have them working in one collaborative group. And I think that hits the sweet spot of what a lot of clients are looking for. And you're not seeing that in some of these big companies because they have to break so many structures and deals and so forth that they've made in order to do that.

Last question on sort of a related topic, which is M&A. And maybe, Jason, over to you. Stagwell built through a lot of strategic M&A 8 years ago when you guys were founded. You combined with MDC, which had made a number of acquisitions, and you guys did 8 last year. How should we think about the M&A strategy going forward? And what are the areas you guys are focused on building around?

I think we'll stay pretty consistent with what we did last year and sort of build upon it. I think the lowest hanging fruit for us right now is really international expansion. We're 85% sort of North America. We think that's probably should be closer to 60% over time. We have a great set of affiliates internationally to help us win global contracts, so that's great. We could easily capture more dollars of revenue that way. The second is the cloud. We've -- much like we've built the sort of the agency infrastructure early on in Stagwell, we now have a really strong sort of Stagwell Marketing Cloud infrastructure that we could drive new products through. I think valuations have come down this year so it's exciting to see what we can -- what will come to market that we might acquire. And lastly, just continue to overall sort of improve upon the capabilities that we have, right, within sort of digital media, which includes content production, new mediums, TikTok, connected TV, et cetera, wherever we can sort of expand our capability set and also within digital transformation, whether that be implementing Adobe Experience Manager and other new services. So those are the 3 main legs, and we'll probably continue to execute upon that this year.

Great. Why don't I pause and do we want to go to the audience for questions? Over here.

I had one about -- when I compare your revenue growth in full year 2022, both Stagwell and the major ad agency holding groups, your revenue growth was much bigger than a lot of the digital ad platforms, whether that's Snap or Meta or several segments within Google. What's your take on what happened in full year 2022? And do you see this trend continuing over the next few years?

I think what we're seeing is more competition within the digital advertising space. There was not an unlimited amount of consumer time, right? And advertising -- most advertising is related to consumer time. And so it's shifted from linear TV to thumbing through my Facebook, et cetera, but now I've gone to TikTok and I've spread my time out that way. And the same thing, as I explained on the digital -- on the purchasing side, if people aren't just going to Google, but also going to Amazon, I think we've seen retail marketplaces really strengthen and grow. I think that we have seen now connected TV really beginning to grow and I think well positioned to take off. And I think you've seen that there is a limit, I think, to like the number of ads and so forth. And I think the increased competition here is generally good for our clients. Generally, greater complexity will be better for us and greater competition. If it brings down digital marketing prices will also be good actually to create, I think, higher volume over time. So I think that the issue here is not one of a digital marketing pullback as much as I think it is an issue of increased competition. And there also tends to be some pullbacks in some of the areas in the kind of the P&G pullback and P&G is not as big a client for us. We tend to be somewhat more oriented towards travel, spirits, entertainment and technology companies and service companies in general, in banks and finance. And so our sectors, I think, also are a little bit different, where the big holding companies are much more reliant on the packaged goods services.

Just a quick follow-up. You mentioned retail marketplaces in CTV. Where within CTV are your clients allocating the most spend or shifting spend?

Well, they're just beginning to experiment with the Netflix, which I really think will open up. Again, it's just a question of time allocation, right? So people are going to tentpole events. Sponsorships are strong, but TikTok, the biggest growth generally in what we see is TikTok. And I think advertisers are moving pretty significantly to that. And we'll see what happens with that. And then I think you're going to see the Netflix piece develop nicely.

Maybe one more question if there is.

Mark, can you talk a little bit more about retail media? It obviously gets a lot of attention for sort of the flow of money and sort of Stagwell's assets in terms of performance and driving client impacts or client results through retail media channels.

Yes. I think, as you know, we invested recently in Brand New Galaxy. So we've built up more of our e-commerce practice. And with that also comes expertise in the retail area. Look, I think it's natural. To the extent that there are large retail platforms, those platforms have discovered that they can make as much money out of advertising as they can on the actual sale and delivery of the products. And inevitably, in technology with the exception of Wikipedia, you go from what are organic listings to what are paid listings to what are then increasingly competitively paid listings because they will make the difference. And I think you're seeing that play out. I mean you look at a typical Amazon search today, the number of sponsored links that you see before the organic links and you go back 5 years ago, and you wouldn't have seen those. Now again, I don't think it's unlimited in nature, but to the extent that there are platforms that either go to niche markets that are hard to reach or close to the purchase chain that, increasingly, we're also seeing people also be able to click and buy in those things and making -- kind of reducing some of the friction involved in the whole process. So again, I see that primarily as competition versus Google because -- and Bing because if you skip search and you go to the platform, depends how worthwhile you find searching first is in terms of providing competitive retail alternatives. But even those today are mostly paid for leagues.

Great. Thank you, Mark and Jason. Appreciate it. And thanks, everyone, for coming, listening to Stagwell tonight.

Thank you.