Stagwell Inc. (STGW) Earnings Call Transcript & Summary

Good morning, everyone. We can go ahead and get started. A couple of disclosures. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear at the handout available in the registration area and on the Morgan Stanley public website. Okay. With that, I'd like to introduce Mark Penn, Chairman and CEO of Stagwell. Stagwell is the digital-first global marketing challenger network built to transform marketing. Mark, great to see you. Thank you for coming.

Thank you for having me.

To start, I guess, can you give a high-level overview of Stagwell, how it came to be and what differentiates Stagwell from other competitors in the marketplace?

Sure. I started Stagwell 8 years ago with an investment from Steve Ballmer and myself. I always say it was a larger part of my net worth than Steve's. The -- and the goal was to create a new marketing company that would be digital first, that would be the first real competition for the major marketing companies in 40 or 50 years and to be digital first and, at the same time, to build on what I had as 40 years of experience across polling, public relations, messaging, advertising. I ran Microsoft's advertising, I ran Burson-Marsteller, I ran several presidential campaigns. So to put together that experience with my business know-how to build the company. And so 8 years later, we were at 12,000 people, $2.5 billion of revenue across the disciplines, and we are, in fact, I think, achieving the vision that we set out to achieve.

That's great. As you look ahead into 2024 and beyond, what are your investment priorities for the business? And what are you most excited about?

I think if you go to what is the vision of Stagwell, it really is to be, on the one hand, full-service global in nature; on the other hand, also have tech self-service platforms. So if you look at where we are now, we are 80% U.S. We're 20% international. We are scaling up in the contracts that we achieved. When I came, we were doing $1 million to $3 million contracts. Now $3 million to $5 million are probably the sweet spot. We're getting more $10 million to $15 million. We're beginning to break into the $20 million leagues. All of those things are kind of what I call climbing the ladder. We're in 34 countries. Our objective will be to be organic with our own facilities in about 55 countries. We also have 70 affiliates. And we are, in fact -- almost every pitch that we run is against 1 of the 4 majors.

Speaking of geographic exposure, I know about 80% of revenue comes from the U.S. Do you have a long-term ideal mix?

Ideally, we'd like to be 60-40 U.S. I don't think it's going to flip around to 80-20 the other way, I think, 80. And most of that is not so much to dominate in global markets. I think we're very, very strong in the U.S. There's virtually no assignment in the U.S. we don't have resources to accomplish. We're opening -- I made my second priority establishing a firm business in Europe. We had a lot of smaller operations in Europe that were disparate in nature as of this week, actually, and we'll have the formal opening in about a month. We've opened up Blue Fin, which has 750 Stagwellians from research, media, creative, public relations, across all the disciplines in one place. This is making a tremendous difference because now as a one-stop shop for Europe based in London, we're getting, again, $3 million, $5 million. All of a sudden, we're getting pitches in Europe of the size relative to Europe, relative to the U.S., that we would get, which we were not getting. And I think that is going to open the doors for us for significant growth. Already, I think the U.K. was -- grew, Ben, if I have this right, something like 20%. And I think you're going to see that when we put the assets together -- we've done the same thing in Singapore. We've got critical mass going in Singapore. So the goal here is to kind of continue to extend out our presence in Asia. We just bought our first office in France so that we're extending more into the continent as well. And then I think you're going to see some activity in the Mid East over time where we just have a small footprint.

Got it. That's helpful. And on the European theme, Stagwell recently acquired Sidekick and What's Next Partners, both European-based. I guess as you think broadly of the current M&A environment, how are multiple trending -- how are multiples trending in the private market? And are there any other specific type of acquisitions you're focused on?

We are generally conservative buyers. We're not -- we are, in fact, most often the second bidder because we provide an environment that, I think, the companies like and feel they can grow in as much as an economic return. We will -- a lot of the companies that we would not bid up for wound up at S4. And so we're very disciplined, I think, in our approach. I do think the market has gotten better. I think you were -- basically, if you go back a year, people were -- the market was so bad that people were just not going to even put their companies on the marketplace. We, again, tend to pay 5 to 7 multiples all in. Maybe that will go 6 to 8. I think there's a little bit of upward movement on that. When we sold an asset, we got an 18x multiple for it. So if you have the right asset in the right place, you can get a really strong multiple.

Great. And speaking of recent sales, in the fourth quarter, you sold a noncore asset for -- I think it was $245 million gross proceeds. Are there any other noncore assets that you're potentially looking to sell?

There are. I think I've said at least 1, possibly 2 noncore assets. I think we're going to sell -- if you kind of think of it, I think it's an integral part of our business. We are a platform. We do acquire a lot of companies, particularly at the kind of $30 million level, and we grow them to the $75 million to $90 million level. And some of those clients, some of those companies really can achieve a nice multiple in the marketplace. I think we don't want to get rid of our core assets, those that are building -- those that can be marketed as part of the global marketing structure. But if something is really not part of that, it's really noncore. And sometimes, we invest in some interesting businesses that were not exactly in line with the core philosophy, and we've grown some of those nicely. So I think there'll be about one sale a year. I think this will be integrated into our normal processes because we do have a lot of assets. And as long as our stock is undervalued as it is, I can -- if I can sell at -- if I can sell 12 to 18 and I can buy at 5 to 7, I have a good reinvestment path for the capital.

Sure. That's great. Switching gears a bit. A key part of the ad agency offering is paid media. Stagwell's performance media is one of the only principal capabilities that had positive net revenue growth as last year. Can you talk a little bit about that growth trajectory of that current business?

Yes. No, I think, although it was a tough year in media, I think we managed to eke out some growth in that. I do think that there's going to be stronger growth this year. We've had a lot of positive wins coming into the end of the year and going into the beginning of the year in the media area. I think it is a strongly developing area. It's also one where, as I said on the earnings call, we'll continue to invest down the media chain from targeting and servicing and placing to -- down through the rest of the chain. I think over time, you could look for us to do that and differentiate the service with those added elements of data and media acquisition.

Got it. Smaller than media but still important to discuss is creative. It's had a decent amount of structural pressure on fees over the years as the cost of production has fallen. Is this an area that's a headwind to overall media growth for you? Or how do you view that?

I view it as a complementary service that we don't expect -- generally, if you look at our models, we said creative will have the slowest growth. So then you say, well, why do you have creative at all? And I say, great, just show up with some computers, okay? And the truth is people try to show you up with computers. And we had a choice, really say that you can do the entire waterfront from great creative to great targeting to media acquisition. And I believe that the largest scale and most secure clients want you to be able to do all of those things. That if you look what makes a great marketing campaign, right? You've got to have good strategy, you've got to have good creative, and you've got to have good execution. And we want to be in all 3 of those levels because if you hit all of those right, your marketing campaign can be as much as 8x times what one of those elements wouldn't be. So we're a believer in that, and we have some fantastic creative agencies.

Sure. That's helpful. Another capability, digital transformation, brings to mind a lot of the competition that's coming in from consultancies. What's your view on their product offering and how Stagwell is differentiated?

We're positioned for the last mile. We're positioned for the consumer experience that one has. And if you think about companies nowadays, fewer of them may do a full advertising or marketing campaign. And more of them will have as their central touch point the consumer online experience, and we build those experiences. So it's not just that we build e-commerce sites, news sites and complex experiences or things like the CNN Magic Wall, it's that there is a last mile here between your systems that are going to do the supply and operating and data and what actually faces the consumer. And I think we're going to see a real takeoff in restructuring of those things in the coming couple of years as people have to infuse them with AI. And so our competitive advantage will be maybe you're going to hire somebody else for the supply chain. But are you going to get people who are better at the front-end design and consumer experience than us? No.

Would you say that last-mile offering is what clients are seeking the most in the digital transformation capability? Because I know that's about 25% of Stagwell's revenue.

No, it's not what they seek the most. Mostly, they seek a lot of boring back-end stuff, but those are even more difficult businesses. Look, I would say digital transformation for us this year was the unexpected hole, right? I think that we've had kind of 7 or 8 straight years of digital transformation backlog and then particularly coming out of the pandemic. And then I think with the year of efficiency, there was a huge pause because a lot of our -- even we are kind of tailored to the tailors in many sense of the word in that a lot of our clients are the tech companies themselves. And some of -- what I see now is we've seen an easing up of some of that, not back to whole thing, but I just think it's a matter of time before -- look they're building. I'm sure NVIDIA is here, can't make enough chips. And then there's cloud, and then there's applications. Well, unless people encourage us to build the applications and do the front-end uses, those chips are going to sit there rather idle.

Sure. Yes, that's helpful. In terms of -- I guess if we can hit on before going into some of the tech exposure guidance broadly. You provided guidance for the year for 5% to 7% organic growth in '24 with an adjusted EBITDA margin in the high teens. How should investors view that guidance in terms of some of the macro risks you attempted to factor in?

I think that obviously, things didn't go as we expected last year, but they did go as we expected the 7 years before more or less, which is how we're here at the scale and size with so little investment, having built it up. I think the -- I think last year was the outlier or the exception. I think we've taken a prudent view towards guidance given that we think we're coming out of some of the trends last year, but we're not completely out of them. But clients seem to be -- certainly, there was a kind of a good push to get going. A lot of people have been holding off things, really started to get them going come January, come new budgets coming in. They were trying to get through 2023 themselves. So I think that you look at it and say, look, we have some improving trends underneath. Maybe the Fed will get to actually cutting rates, which I think will be very strongly in our favor in a lot of ways because I think small caps have been disfavored during the period of high interest rates. And also because it will give more confidence to the clients who -- for the spending. I think you have AI projects coming online, and you have the biggest political season in history. So I think those are tailwinds that give us more confidence in 2024 being the 2024 that I hope we will make.

Great. To follow up on the tech exposure, I know in the last earnings, you noted some tech clients beginning to reengage. Do you have any more color on what you're seeing now that we're in March, maybe the types of conversations you're having with these tech clients?

Again, I think from a marketing point of view, part of our role is helping explain AI to their consumers. So I think you see us kind of actively engaged in some of those assignments, helping to build the last mile and what AI will look like and what it will be to their consumers. And I think that's a lot of kind of the newest conversations. We're seeing some people who are out in the market, who had really trimmed down in terms of outside services really begin to put out some RFPs. But again, I'll say, coming back, but what is the conversation about these days? The conversation is about AI.

Sure. Yes, I would be remiss to not ask a question about it at this conference. In terms of Stagwell's use of artificial intelligence, how is this being used for -- on your end to improve data analytics, creative ad targeting capabilities? I'm sure there's a lot that can be used there.

Yes. No, I think that we're using it at all levels. I think we're using it, number one, in digital transformation to help clients answer those questions. Number two, we're using it to simplify some of the creative and research processes. Things like analyzing focus groups and creating storyboards can be greatly facilitated with AI. Some media can be improved, but those sorts of algorithms have been in operation for quite some time. And then we are building and we continue to invest in -- and I invested about $20 million net into our tech products that also serve as a key differentiating role in the PR industry. Our tech product writes the news release for you, figures out -- uses predictive AI to figure out which journalists and podcasters would be favorable to you and then writes all the pitches so that it's a huge time-saver. Our suite of Harris research products, which is still being incubated, is really a self-service suite of research tools for market researchers. And we're building a media studio, which is a very similar kind of thing for clients and other agencies.

That's great. I get questions from investors around AI in the advertising space broadly. When you think about the industry from a long-term perspective, how do you see AI evolving within the ad industry generally?

Well, I always like to give the example that many years ago, I had a survey research company, right? We still have -- we have The Harris Poll. And so to do a survey in those days took about 63 people, right, including live telephone interviewers, including keypunchers, if you remember those. And today, you can do the same survey with about 2 or 3 people. So do we still have surveys? Do we have margin in those surveys? Yes, we do. So I think when you look at these services, they become increasingly efficient. But the sophisticated work of creativity, of analysis, of targeting, all of which require a higher level of sophistication and input and not a lower level, we'll still be there even if they're radically different in the way they're executing.

Got it. That's helpful. As you think of the financial impacts, both from a top line and margin perspective from AI, how would you frame the opportunity in potential investment implication?

Again, for us, I believe the biggest opportunity is every single website will have to be reprogrammed, that the interface with consumers should be more personalized and should either be voice-driven or query-driven in ways that it's not now. And then as soon as a couple of big websites are built in that manner, everyone will realize that they have to build their website like that. And I believe it will kick off an enormous round of work. And so I think that's the biggest element of AI. As I said before, we'll have some products that we're getting out, and we will definitely have some internal processes that are changed and simplified. But the biggest thing is that AI changes how people interface with technology. And then in the past, you had to interface with technology in an incredibly precise syntax. You have 2 ways of interfacing. You can ask Google things in kind of Google speak, where you put TV, Sony, 25 inches. Or you would have to, in voice, talk in a syntax that was rarely understood. And I think you're going to see that undergo a significant change, and it puts you in a much more Star Trekian world.

Got it. Some investors worry that service organizations like yours might be disintermediated by AI. Some of the -- there's some interesting content creation tools that are already coming to market. Is that a concern misplaced? And if so, why?

Well, yes. No, I think to go back to my survey example, I don't think you shrink more than 63 to 3 unless you think it's going from 64 to 3 to 0, right? Maybe now we can have some tools, and it's 2, but those -- they still have tremendous value. What I always say is the value of data is, over time, sinking to 0 and the value of analysis to infinity. Because simple projects and simple things are solved by computers or automatically or, just as you're experiencing with your self-driving car, it's easier to do the highways than it is to do the local streets. And so what happens is that those remaining problems become more and more complex and more and more sophisticated so that your market space and how you execute things changes. But I do not believe that marketing is going to be run purely by computers. Obviously, programmatic ad placement is a huge benefit and a boom. But because now you have a multiplicity of social media outlets, TV outlets, connected TV, we also have a much greater degree of complexity that a marketer has to solve. And that creates more work. And then not only is there complexity, but then you have to worry, well, if I gave it all over to one tech company to solve, they're going to just provide their solutions, and the truth is I need an independent solution. So I don't think at the end of the day, the story of agencies being disintermediated is an old one, old as time. I always say, Americans don't like marketing because they think the product should sell without it and that they kind of always want to kind of sell them without the marketing. But it turns out that marketing is about 13% of every dollar and is a critical differentiator between a successful and unsuccessful product.

Definitely. Let's switch gears a bit to political. You've described it as a -- I think, maybe a hypercompetitive political year. Can you remind us how you're exposed to the U.S. political election cycle and what type of growth driver that should be in 2024?

Sure. We have some companies that are engaged in politics, on one side, running campaigns; on the other side, low-dollar fundraising. And so we have a diverse exposure to the political marketplace. And we expect this to be the biggest political year in history, and we believe that we're well positioned to provide good service in those areas.

And as you think about your political advocacy guide for this year, what's baked into that guidance? And how should growth trend as the year progresses?

I think you could do the math to figure out what's baked into the guidance. We give you -- I mean I decided early on that you'd never be able to model the company if I didn't give you ex advocacy and advocacy because you wouldn't understand what happens in the odd years versus the even years. So again, I think '22 is generally going to be a lighter year. '20 was a very strong year. '20 also had a runoff in Georgia that was worth an extra $10 million, which we probably don't have any analogous event. But I do think the political marketplace itself ought to grow, I think, like 20% or so from what it was in '20.

Got it. And staying on the topic of guidance, could you walk through the puts and takes of the margin guide? Where are you currently investing? And where are you looking for efficiencies?

Yes. I think that we're looking for efficiencies, first, in the back office. We've spent -- we really only got together about 2.5 years ago when we did the -- with the merger. And so it's about time now that we've got centralized HR, centralized accounting, centralized media. The systems have pretty much come online now for about 90% of the company. And I'm a fanatic about trying to run the back office more efficiently. And so I do think there's another $30 million to $35 million that can be taken out of those back-office operations. But in the front office, we're also doing centralized production now that, we think, will be online by middle of the year. And we're also building our own survey panel. And so each of those moves could be worth another $10 million or $15 million a year. So that's how -- I think, obviously, there's been some labor inflation over time here but some added efficiency. So I think getting the firms in a mode of understanding that it's cost-declining service over time is an important mode as it becomes more efficient and tech-friendly. So I think those are the various areas that we operate, but our goal is to get back to about the 20% margin over time. I think we've guided to less this year because, again, I think we're being prudent.

Great. And on that guidance, when you think about your organic revenue growth and how that flows through the model, how much does that have an impact on the margin guide, just general top line?

It does because in some ways, you're a hotel, right? And if the guests don't come and your hotel is empty that night, it still cost you exactly the same to run the hotel. So in the -- I mean the reason why marketing companies have been, I think, as secure in the marketplace is that we're a variable cost industry with not that many fixed costs, no copper mines, no planes, things like that. So we can usually, over 60 or 90 or 120 days, adopt to changing economic circumstances. But in the short term, if everybody is like -- I think when I look at the difference between 2022's January and 2023's January, in the short term, if people come in and make changes, we can be stuck with a change in the margin. But we will -- over the long term, either the business will come back, or we'll adjust the cost down and we establish our margin footing. There's no long-term reset like that, even if there are short-term dislocations.

Got it. You got about $213 million net new business wins last year.

About $270 million. That was Q3, third quarter.

$270 million, got it. How do you expect that to translate into revenue growth? Is that coming in?

Well, as long -- again, we had the thing where we continue to show strong new business. Look, the thing is that is the strongest new business LTM in the history of the company or companies either way. So I think that, that is a good start to the year. It's all about what our existing clients and projects do. Last year, existing clients and projects had a kind of level of pullback. I've given the guidance that I've given. I've been prudent figuring things could still go wrong. But if that number was $150 million, I probably wouldn't even be down here. With that number as it is, it gives me confidence that we're growing in stature, we're growing in assignments, we're growing our client base. Even if there are some cyclical changes that we have to adapt to, we will adapt to them. The most important element of our story is our growth within the industry and going to larger clients and bigger and new names.

Sure. And Mark, how are you thinking about growth from a long-term perspective for Stagwell? You previously said you expect 10% to 12% long-term revenue growth. Does that still hold?

Yes. We have not changed the long term because we think that, that was an exceptional year. We're going to see how political kind of flows through this year. Our tech products are really still in incubation. So when I kind of look at -- when you kind of -- and the only thing that really is an element -- so what's the one thing that changed in the growth story? It's the digital transformation. But I'm not prepared to say that was a long-term change. I'm prepared to say that, that was a year of efficiency that's now going to lead to a year of competition, and that's then going to lead to like 5 years of AI applications. And so if that turns out to be the case, that's going to fix the digital transformation side. Our growth as a company will get us into larger and larger contracts, and our tech products by 2026 should switch from a drag to a lift on the company.

Got it. That's great. Shifting gears maybe a bit to retail media. The rise in e-commerce and retail media post pandemic has continued to alter ad budgets, really investment priorities in the industry. Can you speak to where retail media fits into Stagwell's offerings?

Sure. Again, it's part of our Assembly, GALE media offering. It's also -- we're also hired on the other side of that, where companies will hire us to structure their retail marketplaces or structure the content and flow of content so that they can maximize their return on the retail marketplaces.

Got it. When I look at your balance sheet, you're at about 2.5x net debt-to-EBITDA. While relatively low, it's still higher than some of the other agency holding companies. How do you think about leverage? And ideally, what's your leverage target?

Sure. I mean I think that when you compare us to those other companies, they're in a mature phase. When they were in our phase, they had our profile or higher. Because we're in a growth phase and we still have to continue to get out there, finish the global marketplace, continue to invest in technology. So I'm comfortable between 2 and 3. I'd like -- if we don't do a major acquisition of sorts, I think it will -- and we do the disposition, I think it will edge to 2 or maybe slightly below or slightly above as a year-end target. But I'm also comfortable in 2 to 3. I think what I said on the call is the most important thing is achieving the vision of the company. So there's no point in getting to some low multiple like that if you're stinting the investment in what you really need to get to the next level of growth. That's -- so the most important thing is making those investments. On the other hand, I'm -- we've been prudent buyers and kept things within what I would say is a comfortable range.

Got it. That's helpful. I guess we can open up to any audience Q&A. We have about 5 minutes left, if there are any questions. Sure.

Mark, on the political front, obviously, no primary season a little bit this year. Does that impact your advocacy business in any real way? And as you think about longer-term M&A, is this an area you'd like to get bigger in as a company, just given the trends in political seem to be hyper growth for many years to come?

Well, the funny thing is when I did political work, I used to be somewhat frustrated because I would say, they really spend more on marketing a hamburger than we do on all our politics. And now I can say they spend more on politics than hamburgers. So of course, now that I got out of it personally, I think our investment is good. I kind of look for international markets. Maybe the U.K., maybe -- where the big democracies, the U.K., India. And -- but I'm happy with our position. I think it is a good complement to what we're doing. But our primary focus is on kind of the large-scale corporate and global accounts. And so I don't see a diversion from that strategy, but I see us continuing. And political and -- we call it advocacy because it also leads to a lot of public affairs. So outside of the actual campaign season, there's a lot of public affairs work. We've created something we call the Risk and Reputation group. We've kind of incubated that for the last year or so, and now we're beginning to get our first big-scale clients, where clients that have really large image problems, political or nonpolitical, can hire a suite of Democrats, Republicans, investment advisers and really tackle those problems. So I think you see the advocacy expertise manifests itself in several ways. And I'd like to take some of the political skills in fact. The other thing I did was always I would go to the politicians and do things differently. And they would say, why should we do it that way? And I'd say, well, that's because AT&T does it that way. And then I'd go to AT&T and they'd say, why should we? Well, President Clinton does it that way. And so I do think there's a cross-pollination of techniques. And I'd like to see that our political fundraising kind of -- it broadened out into nonprofit fundraising. I think that fundraising -- people today are more involved, more willing to give, more willing to participate, more engaged. And I think that's the beneficial side of social media, and I think that's a very important business to continue to expand in.

Great. It's helpful. Maybe just on the Stagwell Marketing Cloud. Can you provide a little bit of color on what is it, what's been weighing on some of the growth recently and then where you see growth tailwinds for the business?

Well, I think the best news, again, that I said on the earnings call was that the Major League Baseball approved our ARound app. If I were just a stand-alone tech company, that would be like a major deal. So we came from idea, we built it, it's an augmented reality experience for baseball fans during the games. We tested it out on 2 teams. Our goal this year will be to get it in as many teams as we can. And next year, hopefully, we'll monetize it with sponsorships that we're already working with a target on them. And -- but -- so it's a series of products that's slightly different because it's a consumer experience. But most of the products are for marketing professionals themselves, in the media, communications and research area. We found the communications market a little harder to sell to, even though our product keeps getting rated #1 in several competitions. I think the research market, when we finish our Harris Quest suite of products that not only gives you brand tracking but gives you a do-it-yourself survey research that you just type in, and hours later, your survey is done and completed and uses AI to analyze things and creates communities. I think that suite is going to be a real -- when that suite is finished and released later this year, I think a year from now, you will see really significant sales. On the Harris brand part of it, which is automated tracking of your brand image, we have about 150 major corporate customers already. And the media division is a little bit behind. We are still looking whether or not we need acquisitions to really complete that suite of products. But I think when you look at the vision, those products serve as an internal tech backbone that are also available as freestanding products for brands and other agencies.

That's helpful. Just my last question. In terms of talent management, how does Stagwell attract and retain talent? And what are you doing to foster a culture of innovation within the company?

Well, we just finished what we call a second round of the next generation in which someone from virtually all the agencies who's not the CEO and not the CFO whatever but 1 or 2 layers down, all come together and learn strategy, technology, all the latest things in marketing. And then get put to work on several client assignments, and it takes about a week. And we're blowing that kind of next-generation training program out there because if you think of the 2 hallmarks of what differentiates how we're building Stagwell, we're building Stagwell as a brand and internally, expert -- branded set of expertise but collaborative in nature. Rather than smooshing agencies together, we leave you with the Harris Poll, but you've got to work with 72andSunny. How do they work together? We bring them together to really work on assignments on a multidisciplinary basis. The second major plank is that we're tech first and should be early adopters of all technology, and that takes people. I think we've done a -- I think we have been a very attractive place for people to go. I think you've seen the founders all basically stay with the -- with it, who everybody thought would leave. But more importantly, I think you see the next generation of people coming in, taking their positions and kind of learning the culture. And that is what is going to be a long-term differentiator from other places I've been at.

That's great. Mark Penn, thank you so much.

Thank you.