Stagwell Inc. ($STGW)

All right. We'll get started. I'm happy to have back at the conference from Stagwell, Mark Penn, Chairman and CEO. Mark, thanks for being here.

Thank you.

All right. So Mark, we are at an interesting moment in the marketing industry, significant AI-driven change, consolidation among some of your peers. We had the announcement yesterday that we'll get to. But how do you see Stagwell positioned? And where are you most focused currently?

Well, I think we're strongly positioned for AI. I think AI and technology itself was at the core of why I created Stagwell, when I was coming from being Chief Strategy Officer of Microsoft. What I observed was in my work with the other companies was that they were not tech forward enough and they were not collaborative enough. And so on day 1, we opened up really a unique engineering team that was supposed to engineer innovation within the marketing space. And so as AI really came along here, this team is now able to produce AI marketing products that really kind of are part of a whole pivot to our business, which is very strongly positioned with digital transformation, but now is making a number of headline products, specifically AI based. And so I think it's come along at a very good time for us.

So you reported Q1 earnings at the end of April as it relates to the macro, I didn't hear any red flags, but wanted to see if you could just update on this, what you're hearing from clients, how they're approaching media spend, just given all the cross currents in the economy. And I don't know if it also makes sense just to touch upon a big cyclical event coming down the pipe in a month with the World Cup, too.

Look, this really does appear to be the best economy from a marketing and advertising point of view that we've seen since '22. '22 was like when everybody came out of the pandemic was an amazing year. And I think we've had a couple of years or 1.5 years when people were afraid of a recession all the time. And I think what we're seeing now, I mean, if you look at the growth among digital advertising, it was really 14% last year. We're looking at close to 10% growth in digital marketing this year. Obviously, you've seen linear come down. You've seen sports go crazy. You've seen gaming go crazy. I think there's a lot of good trends out there. This is not a time where I see our clients calling up and pulling back and holding projects. It's also not a time when they're rushing and hurting up. It's actually a surprisingly normal time in which I think we're putting on pitches, they are awarding the contracts. They are getting going. I think we're seeing a very normal economy out there by and large, believe it or not.

What about digital transformation, Stagwell's continued growth here, I think it's a contrast to some peers that maybe you've described a pause in spending, what's getting your clients to finally commit or execute to those projects like AI integration?

I think we've always been tilted to the last mile when it comes to AI -- I'm sorry, when it comes to digital transformation. When you think about it, we really do everything that is designed for or touches the consumer as a kind of -- whether that's content management systems for newspapers or whether it's banking products, whether it's large-scale websites for the NBC Olympics. What we're seeing now is that all of the companies need to infuse AI. And so it has kicked off an entire round of digital transformation that fits in very well because we also tend to be, what I call, a premium digital transformation company. A lot of the tech companies are our clients. We design a lot of the interfaces. We're have various products. We have a very active design and then kind of a build. We have about 1,500 engineers. We are finding for our level of digital transformation and absolutely a record pipeline. We'll see double-digit growth this year, and that's in addition to the to the AI products that we're bringing to market.

Stagwell has been pushing up in scale with marketers. I think you last highlighted the average top 25 client was just at about a $30 million relationship. How do you think about moving this higher, both organically and then through the new business process?

Well, I think part of the theory of Stagwell, and particularly as we were built in the early years, largely through acquisition is that we would achieve a bigger and bigger scale. And when you look at what's happened to the rest of the industry, there's really only 4 companies now that can carry out a global marketing campaign. One of them was just here. There's two others and then there's us. So what we're seeing is a growth in the opportunities of larger scale, and we're now in 51 countries with 12,000 people. We don't need 100,000 people to be at the scale to take on the kinds of contracts that were coming in. And I think you've seen, as I said on the earnings call, a record new business amount. I know, I've got 3 or 4 pitches that are coming to fruition in our favor that are just about in signing stage that will be announced over the next 2 weeks. And so I think we're in a very favorable position to continue to scale up the business with larger and larger assignments, precisely because there's now only 4 of us that can really handle these kinds of assignments.

How does that consolidation, I guess, impact the RFP environment and as a result of some of the deals we've seen? Have you seen an acceleration in the pipeline at all?

We definitely have seen -- when I started really 4, 5 years ago, the pipeline consisted of $300 million. We had $1.4 billion. We're going to probably hit $1.6 billion in pitches. We generally do not participate in about 20% of them, and then we win about 1/3 of those that we participate in. And so what we're doing now is we're doubling the forward sales team. We're trying to find every avenue for new pitches so that we continue to grow the business on the top line as fast as possible.

I think you had flagged government as a potentially large category with some breakthroughs recently. Just what shifted in your ability to compete for some of those large contracts and just keeping in mind some sizable deals are coming up potentially in the next couple of years?

Yes. Again, we started about a year, 1.5 years ago and said, look, we don't really have any government contracts because the collection of companies that we brought together typically would not have thought to participate much, maybe an economic development contractor too. But now that we've come together at a scale of about close to $3 billion in sales, that we qualify for virtually every government contract at every level for digital transformation contracts, for tourism contracts, for lottery contracts, for all these communications for website redesigns. We recently had a meeting in our office with 20 state directors of really the -- how consumers interact with state governments. And so there's a tremendous move now for you to be able to interact, believe it or not, with your government on an efficient level, and we're really well positioned for that. . And so we're seeing recently, it hasn't been officially announced, but I know the contract signed, as I said, like a big state tourism contract, a $60 million contract across 5 years. It's just like the tip of the iceberg. So we've shown that we can go out, we can start to win these things. This year, we're going to see there's the Post Office contract up. There's a Navy contract up. There's some major Department of Defense contracts up. There's a lot of contracts up that we're going to play in. And hopefully, by next year, we'll have a pretty thriving -- pretty good and thriving government practice.

And is that a global opportunity? I mean, you mentioned tourism, lottery in all categories that apply in European countries? Domestic opportunity?

There's nothing like the U.S. economy. And so there's actually nothing like the U.S. government. I think there are a couple of opportunities. We've done Swedish tourism, but the level -- when you're looking at these U.S. government contracts and something like recruitment is a $1 billion contract. So there are just opportunities here in the U.S. that are so much more open and so much more available. I think, and they haven't had a new competitor like us come along again in a long time.

I guess, separate to bringing clients in, you've also refocused on sort of protecting the back door, so to speak, right, improving retention? What are the key points to highlight there?

Yes. I think when we did an analysis of what was happening is because you're looking and say, "Well, okay, we have all this net new business, why aren't we growing organically faster?" And the answer was that the business was going through a transformation. And then if, in fact, we were losing very few clients of the larger clients that what we really saw was a lot of drop-off in the small clients. And so now what we've put in is a kind of active client accountability project where every one of these small clients will have an account executive assigned to them and tracked using AI to really make sure that nothing is falling through the cracks and that large and small clients are getting the same level of service. And we've already seen a 4- or 5-point decline in the first quarter of the drop-off of the churn. And so our goal is to get the churn down about 10 points.

On Marketing Services, Mark, you made an interesting comment kind of recently that premium creative is alive and well as opposed to created by the pound as you termed it. Curious how you would contrast that and maybe we could just talk to the outlook for your core creative agencies.

Well, I mean, take a look at something like the Super Bowl. I mean the Super Bowl is kind of the largest creative advertising festival, right, in which there will be 50 to 60 advertisements faced off and there'll be maybe 5 to 10 winners. And we're only 1% of the market, but we're basically about 10% of the Super Bowl. We're about 20% of the winners. And so we are way over indexing. And I think that gives clients confidence in that. And then I think what we're also seeing is that I kind of recently went through some of the RFPs we're doing. And I said, well, do I believe that AI could have come up with ideas like this? And the answer was no. The top-level creative ideas that tend to really be successful are just not things that are easily thought of that really they're somehow orthogonal to what people think and believe. And so we have had several what I call, fourth generation post-Madison Avenue agencies, like 72andSunny and like Anomaly and now Doner, [ Code ] and F&B all of which, I think, have a different take and direction of creativity. And they're offering what I call a premium creativity, which means that creativity in big marketing can make a big difference, just as targeting can make a big difference. So it's getting the right ad to the right person at the right time. And so what we're finding is that some of the other majors have gotten so focused on media that they tended to deemphasize the premium creative, and that's creating an opportunity. And right now, if I look at the 72andSunny and Anomaly, they're both at the zenith of what they've ever been in terms of size and growth in people.

And on the by the pound creative and maybe this is more of an industry kind of question right? Are there kind of challenges to that piece of it?

Yes. I think see a premium creative generally will create a platform that can then be rolled out and copied and duplicated internationally. And that's where, if you had something I'm not going to say like -- but like a media among something or like a [indiscernible] that was primarily about multiplying ideas across thousands of pieces of content. That's where AI really comes in. And we didn't really have operations like that. And so that really doesn't affect us in the same way that it would affect people with those kinds of operations. That created by the pound. It still exists is going to exist, but it's going to be primarily driven through AI. .

Can we impact the AI piece of this a bit more, right? You made a comment about the Super Bowl ads, not something that could have been generated by AI. I'm curious what you're actually seeing in the market, right, because investors, you can engage in conversations with them and imaginations can kind of run wild about where AI is going and what it can displace. But like what are you actually kind of seeing in the market? Where are there, okay, this is legitimate real concern versus, hey, this is completely overblown?

Well, look, when you analyze technology, too much time is generally spent on how it is going to make what you do more efficient. And not enough time is generally spent on how it is going to let you do things you always dreamed of doing, but couldn't do before. And so what happens is the whole slate of what you can do and can create kind of moves up and it doesn't go backward. So yes, what you really see continually is the elevator operators disappear, the toll collectors disappear in my survey business to survey interviewers disappear. And so more concentrated brainwork gets focused at the top. So I've been through this kind of technological change in the survey business, where we started with 63 people to do a survey and now we do it with 3. We still have surveys. We still have the same margin. Some of them are less expensive than they would have been if we were going door to door with people. So there's a wider marketplace, a greater TAM as a result. So but the surveys we do now are kind of years ahead of the surveys that we could have done. And the same thing in visuals and creation in the movies, nobody is going back and figuring out how to do silent films, okay? They move up to another level of creativity and imagination that now can be generated through these new tools. So I think that on the one hand, we do believe there's about 15% to 20% of labor that can be simplified. It would be removed in some of these processes, particularly in production as opposed to creation, particularly in some of the targeting and following the media campaigns. But the high-level intellectual work still remain -- that has to be utilized to differentiate you still has a significant place in the stack here. And that's where I think there is a limit of what AI can do, just as there was a limit of what the PC could do, a limit of what the Internet could do. I mean these are not unlimited opportunities here for technology to displace everything. There are unlimited opportunities to have a new frontier of what creative can be of what we can create, how we can make it more personal and how we can have ads that are considerably more effective.

I guess with that transaction, to the extent there's a cost-plus model that exists in the industry as some of that labor comes out? And how does that almost by definition, impact the revenue associated with some of these...

Well, then technology costs have to go in, right? To that -- again, what I found and the best example I do have is the survey business, so what happened? We did more surveys, surveys came down a little bit in price. The margin reestablishes itself anyway because nobody is going to do it for free, wouldn't -- the businesses just wouldn't exist. So -- and since there is need. So if you look at this, what will happen is if advertising becomes more effective, people will do more advertising. And so the actual -- we will have an industry growth and then you'll have somewhat more to do and then you'll simply -- maybe things will be, like I said, a little less expensive, but already the kind of the advertising and production piece of it is only a few percentage points of what the media costs. . So there's really not much balance sheet savings for people in this area in any event. And a lot of risk, right, because these intellectual areas here of having to get the targeting right, and the strategy right, and the creative right, can make like a 6 to 10x difference and how effective the marketing campaign is. And if everybody has the same AI tools, then what's really going to differentiate you? What's going to differentiate you with superior strategy, superior more engaging creative, and then everybody is going to have reasonably similar targeting.

I want to see if we could discuss Stagwell's Media operations. I know there's some client losses that I think either you cycled out in Q1 or you will soon. And then look, as it relates to media, we've seen notable consolidation here. There's been some retrenching by competitors. So how do you see yourself as position? And it would be great also if you could kind of speak to the AppLovin partnership that you announced earlier this year?

Yes. I mean, we do $5 billion to $6 billion kind of a placement with 75% to 85% of that is online. We don't do as much offline as the others. So when it comes to online scale is less of a factor. And I think what we're doing is we're upping the game in the technology. We've created the Stagwell ID Graph. So we're utilizing our research companies and our platform companies to create really additionally useful data that then we can take the Stagwell agentic targeting system, apply that with customer data to enhance it, give people access to the ability to place media campaigns as though they always dreamed of placing, but couldn't really play. So we're taking a technology-first approach particularly oriented and better targeting in the performance marketing. And we've hired -- actually, the CEO was just complementing me on somebody who used to work at Omnicom, who's really heading up our media lobby. And so we have a crack team. And so I really think we're well positioned in this increasingly performance technology world to compete more strongly in media. But unlike the other companies that are really almost 100% dependent on media. Our digital transformation and our political are really our two biggest growth areas, and over here, our creative is coming up. And so the last piece of the puzzle for us is kind of getting stronger growth in media. And we're going to have very strong double-digit growth in GALE, which combines media, creative and loyalty in a very unique kind of way. And I think on the AppLovin partnership, I think that, again, is just really the -- I think you see a lot of growth in gaming, and we wanted to make sure that, that is gaming advertisement placements, we're really opened up to a broader market constituency. And I think that the partnership really does that.

Obviously, there were some news in the marketing and ad tech space yesterday with Publicis agreeing to acquire LiveRamp. I'm curious your reaction there, any impacts to how you think about your positioning? And maybe you could just frame how Stagwell and what you're building is different than maybe what Publicis is looking to do with their purchase?

Sure. Look, I think, number one, it confirms that our technology-first approach really is the right approach in the AI world in order to be successful. I think in terms of the LiveRamp purchase itself, it will be interesting to see how you can take a platform whose core value is neutrality so that everybody felt comfortable exchanging data and put that into an environment which is no longer perceived as neutral. I think some of the other holding companies we'll be concerned about running their data through LiveRamp. But more importantly, let's say, I'm over one of the auto companies, and I know that a client of Publicis is my competing auto company I'm going to be really concerned about putting my data there. And so taking the neutrality out of that or in terms of its ownership structure, even if a de facto exists, I think it's going to be a significant hurdle. I think in terms of our positioning, again, I think we're strongly positioned to add the AI applications that really need to be added so that it can be used by the clients. And that's our primary focus and approach. And our strategy here is not just to create internal products that we use and deploy as part of our operation, say, to do your media or develop your creative but to have tools that live on top of the tech stacks of the clients themselves so that they can run, own and operate it and even use other holding companies. We really have to I think, be in the business of providing the tools that companies can use in order to really take advantage of AI marketing in this transformed world.

I think since we talked last year, there's been something of a strategic pivot, maybe a deemphasis on M&A and towards the build-out of AI applications. I want to kind of talk through each of some of the key offerings that you're bringing to the market, but just what's the broader kind of opportunity you've identified here and why they sort of build rather than buy approach?

Yes. Look, I think, number one, we always had, since day 1 at the creation of Stagwell, this tech team, I was coming out of Microsoft after our Chief AI Officer, ran Data and Analytics at both Microsoft and IBM. I think that's illustrative. You look at kind of Code and Theory, keeps winning top business transformation agency. We really are staffed with the engineering talent that can really understand and apply AI and can build, whether it's on the painter foundry or elsewhere these applications. And then on top of that, we really understand how marketing works. And so by applying that specialized knowledge, we believe that we can be the -- really the leader in AI marketing applications in the AI world. And I think that is a realistic expectation based on our history, experience and the talent that we have available to us.

I want to touch upon some of the offerings here. Maybe we could start with the Machine. You've stated you think every company will eventually need its own marketing operations, operating system. Maybe we could just touch upon the platform. Why is this something that will be kind of attractive to enterprises as opposed to, say, services from vendors like Adobe or Salesforce?

So we're finding a lot of interest out there. So the marketing operations operating system or MOOS, as I like to call it, right, is really kind of the windows of the system. It enables you to run, whether it's a targeting system. Well, first of all, it enables you to put all your agencies and vendors together. It enables you to do things like let me have a creative brief and then send out the creative brief, get the creative responses, have them scored and then make the final decision. It's really -- when we call it the Machine, it takes all of these intermediary needs that you have to run a marketing system or marketing domain and basically runs them with the assistance of AI. And -- but we're building it in a way that then if you're going to run the Stagwell targeting system, you're going to run 1 of 20 different apps in your tech stack that they will be integrated into the Machine, and it will be on your tech stack. We're finding -- we're already in 4 or 5 installations, some of them in actually forward tech companies themselves because we're going to have the specialized knowledge and training to, I think, build the best ones and to get there first.

There's also Stagwell agentic targeting system, or SATS, that could be sold alongside the Machine or separately, Stagwell Search Plus. I think that's an application for search optimization within AI. What's the key value add for clients here in terms of maybe utilizing their own data? And maybe just can we touch upon Palantir's role?

Sure. We announced a partnership with Palantir. We're codeveloping with two engineering teams, really what we've temporarily called SATS, well, I think it's going to be the brain. And so what the brain does is it will take first-party data, we'll combine it with Stagwell ID Graph and additional third-party data, put it into a single agentic system. And so you say, well, okay, let's take a look at all the customers that bought back-to-school last year. And then really in a minute, you'll have that subset of customers. And then they say, well, what brands did they buy? What did they buy in the Northeast? And what do they buy in the West, how should we change our stocking of various products to be more in line with consumer demand, right? And then I might say, well, okay, let's take a look at the lookalikes within 5 miles of each of our stores. And to have these things done within minutes as opposed to hours and weeks and [ analyst ] time, is a tool that really marketers really have ever had at their disposal, the way that the system works. So we think that there is a tremendous market for this. We're adding unique proprietary data as part of the elements of it. But we think it's -- and look, remember, I ran marketing at Microsoft. So I know what we had and we didn't have, and I was one of the advanced tech companies of the world, right? Well, let me tell you, when you're in one of the advanced tech companies in the world, they don't spend a lot of time working on your internal marketing, okay? And that's why there's actually an opening to sell this even to the biggest of tech companies.

I guess regarding these enterprise tools, how do you think about challenges or bottlenecks like sales infrastructure, selling cycles, putting into place kind of the necessary infrastructure to support the relationships once the product is sold.

Yes. So -- and let me just cover also Search+, now is basically a way to track and monitor how your brand is really perceived in an agentic world and also then how to improve when somebody doesn't go to Google Search or tell me the best TV I should buy from my room. I want a 50-inch TV, to make sure that your brand comes up and that it monitors that and then gives you ideas for improvement. We think there's a good marketplace for that. We're seeing early interest and adoption according to that. And then sorry, your question here was...

It was really just about enterprise tools and setting up the necessary sales or...

I think that's where we are now. I think that's exactly what Stagwell is doing right now, which is that we believe we've had -- we have a product structure. We have the main products that we're taking to market. We typically have been responding to RFPs and have like an RFP sales motion. So we're now kind of putting into place a kind of more of a classic software sales motion. And we are, right now, I think, beginning to hire. What we've done now is we've got like the $25 million goal for this year, we've got about $12 million booked, we've got about a $20 million pipeline on the rest. We built up and that was basically on no salespeople. So we are kind of putting together the sales organization so that really within the next couple of months, we'll be fully scaled to go out.

About 5 minutes left. If anyone has a question, feel free to raise hand if you want. I got one here in the front. I mean can you just wait for the mic, so the webcast can hear you. Great. Thank you.

I was curious, where does Principal Media buying fit in your ecosystem, if at all?

Again, not a major part, Principal Media buying tends to be something that's more part of a large-scale off-line buying. We do have some of our own media. And so we have a large stake of real [indiscernible] politic, we have thousands of airport screens. We have a bunch of travel magazines as well as the business traveler. So we have some owned and managed media, and we have an owned and managed media department, particularly in specialty areas like politics and travel, but Principal Media is not a substantial part of anything we're doing.

Mark, I want to touch upon communications. We're in on year for political. So interested to hear how you view the opportunity for your operations in '26. And then it's early, but what about 2028, it will be the first election with two real primaries and -- well, since 2016.

Yes. Look, I think we're entering a political super cycle here. I think that when people look at it, I mean, we're looking at political races now that are spending $150 million aside, when I was actively engaged in those races, gosh, if you had $25 million, that was an amazing amount. So you're seeing a sevenfold increase really in political spending. And I think these midterms, I mean, everybody is talking midterm, midterm whoever have heard of midterms like 6 months before, nobody even knew they existed. People barely voted in them. So you've seen this tremendous increase in political consciousness. So we really have an operation in political low-dollar fundraising, which is really the best and most advanced operation, I think you'll see anywhere in terms of its ability to raise hundreds of millions of dollars. And we also have a political campaign operation. On the other side, and so we're invested, I think, obviously, I came out of a tradition some of the political work. So I just think the skills that are deployed here are really first [ rate ]. And I think the economics of it are just at a scale that I only -- I got -- I used to be apology and said, if only we had the budgets of the CMOs, it would be amazing. And now like if only the CMOs have the budget of these political figures, I think you've seen a tremendous reversal in that. And I think that it is a growth area. And then by the time we get to '28, I can't even imagine how much is going to be spent on the '28 elections and two primaries.

And is it only candidates? Is there -- we heard earlier from some separate firms that benefit from political that issue spending...

Yes. No, it's issue spending. And of course, the holders, the campaign and then the pack now. So the campaigns have a shadow campaign that allows unlimited contributions. And then you can have a bunch of issues thrown in as well, and you can have referendum. You can have all of these things. It all amounts to the tremendously increase in political interest. And when the country -- when you think about it, politics is winner take all. So when you're at 50-50, the value of the last vote that determines everything is like infinite. And that's why you're in a situation where there's so much spending.

Got it. We're about out of time. So anyone there. Mark, thanks so much for being here.

Thank you.