Stagwell Inc. (STGW) Earnings Call Transcript & Summary

All right. We're going to get started. I'm happy to have at the conference for the first time Jason Reid, Executive Vice President and Chief Investment Officer at Stagwell. Jason, thanks for being here.

Maybe to start, I thought you could give us a high-level view of Stagwell, what you think kind of differentiates it from other companies that play in the marketing services space, like the holding companies or consultancies?

Sure. Stagwell was built in -- or founded in 2015 with a mission to create a different type of marketing holding agency. I was working with Mark Penn, our CEO at the time at Microsoft, where we were also running the advertising budget, and we were pretty unhappy with our set of vendors. So we decided to launch this company with the backing of Steve Ballmer really on 3 core premises: one, to be sort of all-digital, digital-first; two, to really sort of empower the operator as they are successful with capital and through scaling larger and larger businesses; and third, to be fundamentally noncompetitive internally. I think all of our competitors really went through stages where they were pure sort of financial vehicles and they would offer the same term sheets to 15 competing agencies. We don't think that's a very sustainable business model. And all of this has come together to be something that's better both for clients and for talent within the organization.

Got it. So as you noted, you've been with Stagwell since its founding. As Chief Investment Officer, you headed a lot of acquisitions for the company. So you have a long-term view. Interested to know how you see the evolution of the ad ecosystem over the past few years, how does complexity differ in the environment today relative to say prepandemic in terms of how marketers can reach consumers and sort of the challenges in doing so?

Yes. It's been a really exciting sort of past 8 years in the way the ecosystem has evolved. Number one, you're sort of seeing new mediums come to market on a regular basis, things like TikTok and CTV and e-tailer marketplaces, new places where people can engage with the consumer. At the same time, you're also seeing a convergence between what we call digital transformation, which I think we'll talk about later and digital media, right. There's a holistic ecosystem and how you can reach the consumer now through owned platforms, e-commerce and applications and then connecting that to the creativity and the media as well as a single unit is really what's working in the marketplace.

All right. Well, let's touch upon digital transformation. You guys have built yourself as a leader in that space. It's a term we hear from your competitors, also from the marketers themselves. So how would you sort of explain what digital transformation actually is? It's not just converting your paid media to digital, right? Any other kind of relevant examples that you can provide?

Yes. Look, I think it's a buzzword that gets used a lot, and I'll do my best to sort of holistically address it. For us, well, let's start, the broadest level is the conversion of every part of the enterprise processes to digital processes. For us, that really means the touch points with the consumer, right, where it previously used to go into a store, now there's a digital storefront. You might have had a catalog, now there's an e-commerce site. So it's that touch point with the consumer for us, but it's a bigger definition than that. And it's -- to me, it's a 20-year sort of investable thesis at least from this point. If you think about the third industrial revolution, if you will, was really the datafication of the enterprise, right, pulling data out of your consumer touch points, your logistics, touch points, any process within the enterprise. The fourth industrial revolution, if you will, is really the application of AI and ML to those data points. And I think these -- this is something that's going to continue through the next 20 or 30 years and Stagwell will participate in different parts of that system.

And let me touch on that a bit because a question we've sometimes received on the topic of digital transformation is how much of this is a product of the pandemic? Meaning, did marketers move with a sense of urgency due to circumstances at the time. And now that we've cycled past that, is there going to be some sort of more normalized rate of investment into that process?

It certainly was a spark, right? It certainly was a spark that triggered an arms race. I don't think we'd be talking about AI and ML as much today. We did have that acceleration in the data layer at the enterprise. So obviously, that was an acceleration. Things have normalized a bit. Nonetheless, it's an above-market secular theme for growth for us. So I think you'll see us continue to invest in others as well.

Got it. Maybe let's shift to the marketing environment currently. A lot of uncertainty out there given the macro, how our advertisers responding? Are you seeing pauses in spend requests for flexibility, kind of what's the tone?

Yes. I think towards the end of last year, the fourth quarter and the first quarter this year, we saw some softness in particular among large tech clients, which is about 18% of our client base. We are seeing -- starting to see some signs of change in course. April was our biggest new business month in the history of the company. What I think you're seeing is more confidence now. We went through the period of layoffs. Now we're in a period of people coming back, those clients coming back. The banking sector is also sort of stabilized. That was sort of 6% of our revenue base, while SVB was not a client, First Republic was. But I will note that JPMorgan is also a client. So those things kind of work out. So yes, we're starting to see things sort of get better over time, which is how we expected the year to play out. And I think with inflation tempering and hopefully, the Fed is starting to be a little more reasonable, the environment should continue to improve.

Okay. So that sort of commentary about regaining confidence, that's not specific to tech. That's more just like a broad-based?

That's broad, but we're speaking that specifically with tech as well.

Okay. And just sort of kind of diving into the technology piece of it, right? You have a somewhat higher share of clients in that vertical. As you noted, I think that's generally considered a positive, right? But obviously, at the moment, there's headwinds there. Like how should we think about the outlook for that vertical for the remainder of the year? Is there something kind of specifically built into your own forecast? What's the right way to do it?

Yes. I mean, I think we're forecasting according to the budgets that we've worked out with our clients. But I think it's interesting -- it's a really interesting time to be an agent, if you think how these cycles work, right, with the tech lines in particular. They pull back, they lay off a bunch of people, a lot of that in-housing goes away. As an agent, what you want to do is stay in front of the client at that point when they ramp up and they do ramp up quickly. When they recover, they have to come to you for us first because it's just a longer cycle before they can start hiring again. So it's actually a very interesting time, I think, to be in the agency side of the business.

So I mean, it sounds like we were saying is like in some cases, you had projects out there with tech companies and then they literally laid off the people that were working on them, and it's just a matter of replacing the labor.

Right. Exactly. It's easier to hire us than to hire human beings internally. So I think from a -- it's positioned well, if you will.

Got it. And you mentioned kind of finance is another important category. I don't know if you could say, is that First Republic, the sort of primary exposure there? Is there a fintech lending exposure? I don't know if you want to add more.

Yes, it's only 6% as a category for us. So we're definitely not overweighted. But we did feel the burn of that one client, First Republic. Yes, got it.

Any other kind of relevant category here or verticals...

No. Outside of tech where we have the concentration at 18%, we're very diversified.

Got it. Okay. So Stagwell has provided guidance for the year that is more back half weighted in terms of growth. I think the expectation is double digits in Q3 and Q4. I wanted to see if you could talk to some of the puts and takes of this, and what gives you confidence sort of in that growth inflecting in the back half just given the macro uncertainty?

Yes. Some of it is just straightforward math, right? Like we had -- we grew organically 24% in the first quarter of last year, which made for a very difficult comp in the first quarter of this year. That comp gets 8 points easier next quarter, 5 points easier, again, the following quarter, and I think 3 points easier, again, the following quarter. So if you just maintained a stable growth rate, you would see our numbers accelerate through the back half of the year. That being said, on top of that, we knew the pullbacks in the fourth quarter and the first quarter were happening. They were in line with our budget expectations and the rest of the year continues to play out that way.

All right. I think Mark also mentioned the other day, something about like the fiscal year on some of these client starts, right, on July 1, and maybe that's factors into the way they think about this?

Absolutely. Absolutely.

Got it. I want to ask on pitch activity. I think in the earnings call, someone mentioned 20% dollar increase in the pipeline. It's interesting to know what's sort of driving that acceleration? And then I think it was also mentioned there was like momentum on wins through April. I wasn't sure if you had any update on that?

Yes. No, as I mentioned, April was a very good month for us for a new business perspective. I don't have the latest numbers for May, yet. But you know what I do. And I think overall, I think we're just -- we're getting recognition that we haven't had before. Anomaly was named Agency of the Year in 2022. Another one of our agencies, GALE, was the breakthrough agency of the year in 2022. These are the types of things that fuel pitch activity. And I think we're doing just incredible work across the board. So I expect that to continue.

Are you seeing more of that acceleration in pitch activity on the media side, on the creative side? Or is it balanced?

I would really say across the board.

Okay. Got it. So just shifting gears a bit, day 1 of this conference, AI has been mentioned in a lot of sessions so far. So your company has been pretty clear on this, right? You see this as an opportunity for you. So can you speak to products that you have in the market that maybe utilizes tech now? How do you see yourself as sort of broadly positioned?

Yes. Look, it's AI is something we've been thinking about for a very long time, Mark and I worked on AI initiatives. We were at Microsoft 9 years ago. So it's something that I think -- technology as a whole is something that's infused into Stagwell's DNA. We have a product in market right now called PRophet. It's part of the Stagwell Marketing Cloud. It's a tool for PR professionals to both create press releases and have them evaluated. So it's a generative AI that sits across from a predictive AI. You can put your prompts in, it will write an article for you, a press release for you. That generative AI will then speak to the predictive AI and the predictive AI will tell you with 99% accuracy, that Joe at Bloomberg will pick up this story and that's what his opinion will be, and this is how it will be reviewed by the public. It's a very interesting tool for PR people as they do their jobs. The other key initiative that we announced was a partnership between Code and Theory, who is sort of one of our flagship digital transformation businesses with Oracle. It's an exclusive partnership. They're working to build enterprise AI technologies together. So we're really leaning into it, I would say.

Got it. And anything on the media side to know?

I mean media always -- because this is very -- like it's becoming a buzzword now. The media has always used algorithms to buy, right? It's not new. It's just becoming more sophisticated.

Okay. So a question we've gotten often since this became a pretty big topic a month or 2 ago is how can generative AI upend the market for creative services, right? Do these tools potentially are barriers to entry or do they allow marketers to start pulling work in-house potentially?

Yes. It's something -- I always find it entertaining that every article you read about AI is like a Doomsday article. I guess it's more -- it sells more clicks to write a Doomsday article about AI, but it's just fascinating what -- how it will affect the future. For example, yes, generative AI will lower the cost of producing content and creative content but it is a tool that will get used, right? So go back to my -- this scenario where now let's move from PR to, call it, just creative and media together with a generative AI and a predictive AI. At some point in time down the road, that generative AI will be able to create a piece of content and speak to a predictive AI and that predictive AI will say, okay, I can convert David with 100% efficacy because I already know that he's going to buy this pair of sunglasses if I advertise to him in this forum. So what does that mean? That means that over time, yes, there will still be a human operator or creative whoever it is, that uses these tools, but the value will shift more towards the data and analytics that are collected and the execution of that to convert that sale, right? So it's exciting. We just have to make sure that we continue to stay on the forefront of it. It will change where the economics are in the business, but it's only going to make life better for everybody.

Is it something that your clients have any concern on, on using some of these tools at this moment, just kind of just given your sourcing data and artwork from the [indiscernible] of the Internet, right?

It's a tool, right? Like I said before, like we already -- like ML and algorithms have been used in marketing for years. This is just an improvement on it.