Stagwell Inc. (STGW) Earnings Call Transcript & Summary

Good afternoon, good evening, everyone. My name is Cameron McVeigh. I cover advertising and media at Morgan Stanley. I'd like to introduce Jay Leveton, President of Stagwell. Stagwell is the digital-first global marketing challenger network built to transform marketing. Welcome, Jay.

Thank you. Glad to be here.

And before I start, please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website.

So with that, Jay, first, can you give a brief introduction on yourself, how long you've been at Stagwell and maybe what you're focused on there.

Yes, sure. So I'm the President of Stagwell. Stagwell has been around for about 10 years. We started as a private company, went public through a reverse merger with MDC Partners in 2021. And my role as President is basically working with our corporate group but also working more with our companies in our group that help them drive growth, whether it's new business, anything from scaling the businesses and all those kinds of things. It's a services business, but it's a technology-enabled services business, so helping them stay on the disruptive business but also has a lot of upside opportunities. And we sort of see ourselves as a disruptor in a space that's being disrupted now. And so I think we're, I think, now in a good position in terms of really sort of take share in an industry that's really going through a lot of change.

Great. What would you say differentiates Stagwell from other competitors in the marketplace?

So we see ourselves as a different group because I think Mark Penn, the founder, and myself, we worked at some of these legacy holding companies, WPP, and we saw the way they ran the businesses. And I think we generally sort of foresaw what the challenges that those companies were going to have 5, 10 years back. And now 5, 10 years forward, you see the issues that they're having in terms of organic growth. They've gotten too big, probably not as digital as you would want -- they would probably want to be. And so now I think we built something that we thought could take share, we thought something that would be digital first. I think also interestingly, we are practitioners in this space. Most of the people who run these businesses are lawyers, accountants or HR people. But for the most part, we are people who've been to client meetings, client pitches. We do this -- we've done this work in the past. And so we really wanted to build something that really understood how to run these businesses financially by working at WPP. And then we also learned sort of how to manage talent, how to manage clients and how to win the next opportunity. And so I think that's what we did. And so like I said, 10 years ago, we were $0. And this year, we're between $2.5 billion and $3 billion of GAAP revenue. So it's been 10 years of acquiring but also growing organically and being able to do both at the same time. And so not everyone has been able to do that, but it's been a good ride so far. And for the most part, for the last 10 years, it's been very solid.

Great. It's great to hear. As you look into 2025 and beyond, maybe what are you most excited about for Stagwell?

Well, I'm excited it wasn't -- it's not 2023. In 2025, I'll say we are -- in 2024 -- coming out of 2024 -- we did the earnings on Thursday. In 2024, I think what you saw was acceleration of our digital transformation business, which has been good. I think you saw coming out of COVID, there was a lot of work in the digital transformation work that sort of got accelerated during that period. I think there was a bit of a hangover period, and now I think we're reaccelerating again. Last year, our political advocacy businesses were super strong. The elections where -- there was a good amount of spending there, and our teams did a real nice job on it, both -- on both sides of the political spectrum. And then also what also the thesis around us in the beginning when we did this merger in '21 was really about winning more at scale and winning bigger client opportunities. And I think what you started to see mid last year as sort of we think people got more confidence with the economy and sort of we weren't going to go into a recession after all of these Fed hikes. You saw more clients sort of coming to market and looking for new partners. And I think what you saw from us was winning General Motors, winning Adobe. In the last couple of weeks, we announced Starbucks and we announced a Visa. So I think you're really starting to see can you get into these bigger scaled opportunities. I think that's what excites us about '25, is digital transformation increasing and growing again and then winning these clients that we have. They have a long tail opportunity of incremental growth and opportunity there. And I think that's really what I think we're excited about at the same time. And then as you roll into '26, hopefully, you continue to have those engines going and the political advocacy work comes back for the non-presidential cycle and congressional races, gubernatorial races. And so hopefully, between those 3 things, you're really sort of in a good place from being able to get a good amount of growth going again.

Got it. And digital transformation makes up about 1/4 of revenue. I think it grew double digits in the back half of '24.

Exactly.

Can you describe just the general product offering that -- for any given client and how you'd expect that to trend maybe over '25?

Yes. When you look about digital transformation, I think for us, digital transformation can mean a lot to a lot of different people. For us, we really compete -- those divisions compete with the Accentures, the BCGs, the Bains, the digital -- the Deloitte Digitals of the world. So -- but I think what's different about us is we are a little bit closer to the consumer. We're not all about back end. We're not about just sort of process automation or BPO. We're more about understanding the consumer interface and how those work together. So when you look at our digital transformation businesses, you're looking at a group of people who are 50% engineering and 50% creative or UI/UX experts. So they understand sort of the back-end requirements, which is important. But maybe as important, if not equally important, is understanding how the consumer interfaces with it, whether you're going through an e-commerce experience. And where do you lose product through that process and where does the product fall out of the basket? Or from a content management system, what's the right type of content people want to engage with? And are they coming in from Instagram? Are they coming in from somewhere else to say that what is the content that they're looking for to engage with? And we've done it across a lot of different verticals. I think Code and Theory, which is our platform group, they're well known for working in the media and publishing space. So if you look at -- they've taken a lot of offline publishers and put them online. When you look at the election cycle, they did all of the work with -- I don't know if you watch MSNBC election coverage, you watch the CNN election coverage. They did the data visualization for when John King is at the screen talking about here's the presidential election results from 2020, here's how you compare to 2024. So there's a lot around digital visualization. And that's getting the right APIs and all the right software. But then again, what's really important is the user interface. How does John King use it? Is it easier for Americans to understand the way he looks at it? I always joke back in the day in 2000 when there was a contested election. Tim Russert wrote the word Florida on it and said, this is super important. Nowadays, they would go into an interface. They show you how Palm Beach does versus 1996 or 2000 or 2004. So really, this digital transformation is really -- for us, it's happening across financial services where we have expertise. It's happening against media and publishing. And it's also happening in politics. I think when you think about digital transformation, raising money in politics used to be about talking to lobbyists or going to big fundraisers. Now it's about low-dollar fundraising, getting a contribution on a text message or responding to an e-mail and donating. And so those digital transformation processes is really super interesting. It has a big impact. And you're seeing it more and more across a lot of verticals, but that's really some of our area of expertise in the financial space, the media and publishing space. And I think you'll see more of what we're doing and coming out is doing even more sort of systems implementations for Adobe, which is a key partner of ours. And then other ones we'll be sort of talking about sort of how do we become more system implementers, not just sort of website, native apps, content supply chain, all those types of things in terms of when it comes to content and how that interfaces with the consumer.

Got it. That's great. I'm glad you brought up a political advocacy-type business because you do have a background in political polling. And I guess -- obviously, 2024 was a record year for political ad spend. Maybe just a high level on how Stagwell benefits from political ad spending, fundraising, campaign dollars.

Yes, sure. So in terms of -- I think when we looked at our business and we decided to start Stagwell, we realized the place that we thought was the most undermarketed was politics. And this really notion, this all started when Obama opted out of public financing and private -- I mean, sorry, public funding of presidential campaigns went to private donations. And then the Supreme Court decided that speech -- that money was speech. And so this opened up a huge floodgate of marketing. And back in the day, the amount of money that was spent on the presidential election sort of was nothing close to what they spent on Halloween candy marketing or multiple brands at P&G would spend more than the president of the United States running for office. Now I think you'll see elections are sort of in anywhere between $10 billion and $15 billion, which is a very sizable chunk, and you'll see Senate races are over hundreds of millions of dollars on spend, and they spend probably 70% to 80% of their money on media or voter communication. So we had this thesis that elections and politics were sort of undermarketed. And so candidates themselves were undermarketed. And I think that thesis has been turned out to be true. And so for us, we are on both sides. We're both on the supply and the demand side. So we're helping raise money, particularly more on the Republican side. And so we're raising money for candidates, and that's across House, Senate races and sometimes presidential and presidential primaries. And then we're -- also on the other side of it where we're helping spend the money, whether on voter communications, TV, digital content, digital media buying, overall media buying, offline media buying, obviously, direct mail, direct communications. I think -- I don't know if any of you lived in Philadelphia. I mean TV was hard to watch. There was a lot of TV commercials. There's a lot of independent expenditures. There's a lot of direct campaign expenditures and then direct mail. And then there's get out to vote. So all of this is just driven by all the donations. And so we've been able to help raise the money and then help sort of spend the money. And I think -- I don't know. I assume in this crowd, many of you got text messages to donate. If you told me the text messages you've got, I could probably tell you if you were -- you were working with one of -- or you were donating to some of our clients. But I think some of our political people and our experts are some of the best markers in the world because you're donating money, and in reality, you're getting nothing back, okay? You're not even getting milk and you're not -- or you're not getting some product. You're getting this idea that you've donated to a cause and to a belief, which is also super important. It Is an expression of your values. And so I think we do a lot, as I said, in the even years around both on the raising of the money and on the spending of the money as well. And it's been a good business. And as I said, I think we had a thesis behind it, and it seems to be right.

Got it. That's great. And then in the odd years, I mean, that obviously drops off. But would you still expect some advocacy-related revenue?

Yes, for sure. I think -- there's elections this year, and we're doing some elections, New Jersey, New York. Virginia has elections. We'll do work in all 3 of those states. I think you also have -- excuse me, you have work in D.C. I think what you've seen for the last couple of years is public affairs, legislative kind of conversations and -- or just political fights on the legislative side has been sort of pretty slow. There hasn't been a lot of legislation passed. I think what you're seeing now, we'll see with the Republicans in power. Anytime there's tax bills, there's always a lot of interest because a lot of people are interested in sort of getting their say around tax, tax bill, tax policy, immigration, health care. A lot of those things really being sort of kind of up for grabs. In some ways, it really leads to a lot of expenditure on both sides. So I think we're looking at a better -- our view is a better sort of advocacy cycle in an off year based on the elections we have. And then we'll see what happens on Congress. I think Trump came in and did a lot of executive orders, and I think people heads were spinning off of that. So now we'll see what happens as Congress starts to get through and start to figure out a tax bill. You're not going to be able to write an executive order off a tax for a tax bill. And we'll see what other sort of legislation comes through in terms of all that. But I think we're expecting more and more sort of real debate around these issues than they have been in the past and more regular order as opposed to just doing an omnibus and putting the bill on the floor and saying, vote for it or don't vote for it, sort of go to a more regular order, which would lead to more engagement.

Got it. That's helpful. Maybe, Jay, we can switch to the Stagwell Marketing Cloud, delivers SaaS and DaaS products for in-house marketers. We've seen solid growth over the past few quarters, but Stagwell has invested, I think, $70 million in it this year. What are you guys investing in? How should we expect growth to start to look into 2025?

Yes. I think what's important, I think we're not just building a software business just because software is a great business. Software is a good business. We're building a software business because we think it's synergistic with the clients that we have. So when you're looking at the clients we have, we have, as I said, the Starbucks, the Visas, the Adobes of the world. They're -- the same clients that buy our full-service offering are also the same people who would buy a self-service offering. So the Stagwell Marketing Cloud is -- the software is about self-service. So you can do -- you can hire some of our research experts to do services work for you for some of the most strategic research questions that you have, whether it's about your brand, whether it's about your product portfolio, whether it's about your reputation. Whatever it may be, you can have some of the best, most expert people from our companies. Or if you're a smaller company, you can use our subscription-based tools to understand your brand, understand the attributes about it, understand sort of how people view it. Whether it's on a daily, weekly, monthly basis, you see that data, and it's a software subscription that allows you to do that. So what we've seen in the industry is that the middle has become a little messy where they don't want to spend $5 million to $10 million for that global brand tracker, but they're willing to spend more money on strategic projects that are important to the business. And then they're trying to software-tize sort of the everyday research that tells them, hey, am I up? Am I down? Am I green? Am I yellow? That sort of goes on to the executive scorecard that says maybe my brand went up 3 points and the brand attributes and -- is sort of in line with our campaign and our messaging. And so the software business, it's a good -- it's obviously a good business, but as I said, we really have a vision around being full service and self-service, and clients can be in between. One of our larger clients that we won in the last year, they use us for full-service advertising, but they also use our self-serve software tool for research and for brand tracking. And that was their choice, how they wanted to do it. So we flex to what they're looking for. But I think people always -- as a thesis against these types of business, what happens if they in-source all this work. Here, we're happy for them to in-source it with our tools or we're happy for them to use our full service. We're happy for them to use a hybrid of both. And so that's the thing. So we've been spending a lot of time on the research side of the business. We have different tools, as I said, around brand tracking, brand valuation, understanding what moves brand favorability and how that ties to sales, which is important for CFOs and CEOs to understand. And then on the communications side, we're doing more and more around helping people understand how to write generative AI to use write news releases. You can give it a few -- you can give it a prompt. You tell the tone that you're looking for. It can write the news release for you. It can also tell you which reporters to target it to. It actually writes the pitch and the e-mail and sends it as well. So this allows you to sort of do all of that yourselves. You can also write your own surveys. You can say, write 5 questions around Trump and Ukraine. It will give you 5 questions. You can edit them. You can then go buy the sample programmatically and say, hey, I want to do 1,000 interviews in California and get their view of it. They will charge you. You can run your credit card. You can do the whole survey. And it keeps track of those things for you. And then it helps you with the data, outputs a PowerPoint or a PDF file for you. So again -- and you can do the same thing with -- on the influencer side where you can upload your creative brief. You tell them, here's the messaging and here's what we're trying to do. It will prompt you with the types of influencers that are -- it helps you sort of give that instruction to the influencers, sends an e-mail out and sort of prompts them. And it tells you which ones that you should go with. It prompts them with the information. And then it helps guide them and give them sort of the output of what you're looking for, whether it's on Instagram or any other social platform. So we really have these tools that, as I said, are -- you can do all the self-service. You can do it all full service. You can do something in between. And that's really the thesis around the whole thing. I think we're looking for something on the -- we believe this business should grow double digits. The services business will grow slower, but the software business will grow faster, should have higher margins at some point. We're spending more money sort of on OpEx to build out the sales teams for these businesses. But overall, to be in this type of space is really, as I said, synergistic with our services business.

Definitely. Okay. That's great. Maybe we switch to AI. It's obviously a big topic and draws a lot of interest. How is Stagwell using artificial intelligence? How is it used to improve data and analytics, creative, ad targeting? And maybe just long term where you see AI to move in the ad industry broadly.

Yes. For us, I think we are -- so it's a bunch of different -- there's AI use cases and a lot of different stuff that you talked about. For us, we are implementing tools, and we have a partnership with Adobe on AI. I don't know if you saw in our earnings video that we did on Thursday. We use Adobe's -- we have a special access to Adobe's text to video platform where, obviously, you type in what you're looking to do or what you're trying to create and you can do it. And we -- obviously, we shared it with Adobe. But that video allows you to take the footage we shot and it takes you -- you use AI to be able to take additional footage and to be able to create and to put a -- orchestrate the right type of video that you're looking to have. So on the creative side, we have a relationship with Adobe. We are putting those tools on the desks of all of our creative groups to be able to create content and also to create videos and all that, whatever it may be, using AI. And that will have a downstream impact of being more efficient and being able to do all of those things in terms of using AI. On the media side, obviously, for better targeting, using AI for better targeting, whether it be for look-alike modeling, whether it be for better ad targeting. And on the -- where these things come together is on the content and on the media buying side, we are looking at some software that we're doing. We might show more of this at our Investor Day. But we can -- we know that, hey, you've been searching. We know Cameron likes blue ties. And the next time that someone serves an ad to Cameron, the next time there's going to be someone in a suit, we're going to make sure it's a blue tie because we know you search for blue ties or we know that you like gray suits and we figure out a way to great suits. And so we're going to make sure that we can take a lot of these data points and be able to use them to target better and be able to look at that first and third-party data to be able to do better targeting. So on the media side, on the content side and then for us on the AI side, on the digital transformation side, we are using AI to -- for implementation for -- if you're a bank and you're a wealth -- let's say you're a wealth management company and you're building a wealth management portal for your client -- for clients, helping them -- they're looking at certain types of data. Are you recommending? Are you anticipating, using AI, what these people are going to look for? You know that they looked at the performance of AppLovin last year. Do you want to -- for the last 12 months. Do you want to prompt them again for how AppLovin has done for -- what the analysts are saying for AppLovin for the next 6, 12 months going forward? And -- or we did this for the real clear polling site where you can tell them, hey, you've been -- clearly, you've been looking at Arizona polling data. Are you interested in looking at how things have performed from 1998 through 2016 in terms of whatever that may be. So we're using AI to sort of anticipate and recommend, and that's really what that is in terms of sort of on the digital transformation side, the creative side and sort of on the media side for sure.

Got it. Some investors worry that with these AI capabilities, services organizations may be disintermediated. There's these content creation tools that continue to evolve. Is that concern misplaced? And if so...

I think it's misplaced. I mean I don't -- obviously, you would expect me to give you that answer. But I mean I think it's misplaced because I think when you're -- at the end of the day, clients are looking for a certain type of look and feel. But also what -- most important, clients are looking to be -- in many instances, brands want to be in culture. And you have to be able to create in the right moment the right type of content that will take time to be able to -- you can work in parallel with AI to do that. I think when you looked at the Super Bowl work that we did, I think some of the best work we did was for the NFL, and that was human emotion work that we did in terms of helping kids live up to their potential. And I think you'll have -- well, I said I think we'll use AI as a tool and as an assistance, but I don't think it's going to fully replace it. And I think that's why we have this vision of creating a company that is creative but technology-enabled services. And so I think using our Adobe suite, using technology and being able to sort of have the right mix of what you saw from our video at the end -- for end of our '24 we showed last week is really the right mix of AI with the right mix of original photography with the right mix of sort of the right story to tell. And I think that's a human and machine-type interaction. It's not just a human interaction anymore. It's not just going to be a machine interaction. And so I think there's an opportunity to have these things work in parallel to orchestrate them. And that's true from creative, and it's true for media buying, and it's true for digital transformation in particular as well.

Got it. That's super helpful. On the earnings call, it sounds like there's an Investor Day coming up in early April. Curious if you could give us a sneak peek into what may come up on the Investor Day.

Yes. I think what you're probably going to see is obviously a look at sort of our different verticals of the company. You'll look at some -- you'll see some of the software we're building, out the capabilities. I mentioned some of it. I think what's more important also is to sort of ground people we haven't done one for the last 3.5 years. So we want to give people a sense of sort of what the long-term target here is for growth, what's the trend rate growth for this business, where do we want to be in the next 3 years from a business point of view. I think we're still 1% to 2% of a very large TAM in this industry. So I think we really want to continue to sort of get bigger, get stronger, have the right type of global coverage and infrastructure to be able to take on large clients that we're looking to compete with. We don't need 100,000 people across the world. We need the right amount of people in the right places. And we don't need to be in 150 cities. We need to be in 30 to 50 right cities to be able to get the right type of coverage. So I think we're really going to tell the story of what this looks like for the next 3 to 5 years. And I think we have a track record of going from 0 to about $3 billion in 10. And so I think you can accelerate the business further faster. So I think you'll see a lot of that, and I think you'll see a lot about technology and sort of the go-to-market for sure. So I think those 2, 3 things are sort of where we'll spend a lot of time.

Great. Looking forward to it. Another topic I wanted to touch on, the Omnicom acquisition of IPG.

Oh, really.

Just curious how you're thinking about the implications for the industry and Stagwell specifically.

I think it was generally -- you're in this space. I guess investors probably thought it's more defensive than offensive at this point. I don't know if that's a fair assessment. I think we're -- as Mark mentioned on the earnings call, I don't think clients are looking for a large behemoth marketing company. I think they like to have their own sort of unique relationship with these types of clients. So I think we're -- I think we feel positive. I think we've -- I don't think it's a different sales motion for us. I think we've been sort of taking share. So I think this is a dislocation. It will be interesting to see what happens. I mean, obviously, the FTC is looking at it. So we'll see what comes from that. But I think once that happens, I think -- I mean I think we're in the sort of the second inning of this right now. I think there's going to be a shareholder vote soon. But I think the question will really be around the execution risk around the whole thing in terms of they need to find $750 million of run rate synergy savings. And I don't think that's going to -- I mean I could be wrong and they can convince you otherwise. But I don't think that's all back office. It will be interesting to see what happens. I think that the first tell will be sort of what happens with the talent. Talent goes or doesn't go. And then what happens is client goes or they don't go. And so I think -- I don't think -- clients aren't interested to make a huge change in many instances, but they're looking to make incremental changes, and small incremental changes for us can be very big and very powerful to be able to get into those clients that, for the most part, sort of have the door closed for an extended period of time. And so the ability -- and I think if they're willing to go from -- maybe they say for maybe this Omnicom agency or this IPG agency, maybe we won't give the next project to them or we'll open the door and make it more of a broader sort of set of companies. Like I said, that's big for us. And one of your other -- the analysts that cover us basically said this trend away from AOR agency relationships to projects plays to our benefit because we're -- I said the hardest thing is to get in with these clients and prove yourself. So if you can get a project and get and do a good job, I think -- and take it to the next level, I think that's really where this is. And I think -- and that's -- it saves a lot of time from doing large RFPs that can take 6 to 12 months in some of these large instances. So I think we're really -- it will be interesting to see what happens, but I think we're sort of in the early game. But for the most part, this is our sales motion that's been about trying to take share and trying to take relationships from existing clients. And I think you're sort of seeing that based on the wins in the last 6 to 12 months.

Definitely. Got it. Makes sense. Last question. You noted a number of wins or expansions recently, Starbucks, Target, Visa. In your view, why did Stagwell win these? What are you guys doing right?

I think they were looking for something digital first. People understood culture. People understand technology, looking to try something new, maybe have worked with some of our legacy competitor, wanted to try something new but wasn't -- that was at scale but wasn't too small. I think some of these clients -- independent agencies in this vertical are doing -- are having -- have done well. But you have to be able to be at certain scale. You have to be able to pass procurement. You have to be able to do certain things and comply with certain types of rules and regulations. So we're at the right size to be able to do that. The agency down the street is not really able to do that. And so you have to be able to prove your case for Starbucks or for a Visa, those types of things. And so it's the right size. It's the right type of go-to-market. It's the right type of technology understanding. It's the right understanding of culture and creativity. And I think that's what you're seeing. And I think you saw that at the Super Bowl. I think the NFL work was really well received. They've done -- we've done a great job, I think, working with the NFL in terms of having the last couple of years sort of get their brand to a better place. And as you can see in live TV, people just really watch the NFL. They watch college football or live sports. And I think the NFL is an example that we do their advertising. We help them with their brand, but we also do their app, with their digital transformation, that type of work. So whether it's the Super Bowl or whether it's the Oscars with the Visa work or whether you're, whatever, at certain tentpole moments, those are still important moments even though there's an always-on element of marketing, even more so with digital platforms. There's a desire to be sort of in these culturally relevant moments. And they want technology-infused creativity, and they want people who understand culture, particularly on the creative side or on the media side as well.

Got it. Makes sense. All right. Jay, thank you so much.

Thank you. Appreciate it.