Stagwell Inc. (NASDAQ:STGW) Q3 2023 Earnings Call Transcript

Stagwell Inc. (NASDAQ:STGW) Q3 2023 Earnings Call Transcript November 6, 2023

Ben Allanson: Good morning from Stagwell’s offices in Miami, Florida. And welcome to Stagwell Inc’s Earnings Webcast for Q3 2023. My name is Ben Allanson and I lead the Investor Relations function here at Stagwell. With me today are Mark Penn, Stagwell’s Chairman and Chief Executive Officer, and Frank Lanuto, the Chief Financial Officer. Mark will provide a business update and Frank will share a financial review. After the prepared remarks, we will open the floor for Q&A. You’re welcome to submit questions through the chat function. Before we begin, I’d like to remind you that the following remarks include forward-looking statements and non-GAAP financial data. Forward-looking statements about the company, including those related to earnings guidance, are subject to uncertainties and risk factors addressed in our earnings release, slide presentation and the company’s SEC filings.

Please refer to our website, stagwellglobal.com/investors, for an investor presentation and additional resources. This morning’s press release and slide deck provide definitions, explanations and reconciliations of non-GAAP financial data. And with that, I’d like to turn the call over to our Chairman and CEO, Mark Penn.

Mark Penn: Thank you, Ben. And thank you, everyone, joining us for our earnings call. Our company is emerging from a more challenging economic environment this year stronger and more nimble than ever and poised to return to growth. This quarter demonstrates that we have our costs under control as we invest in expanding our digital and global footprint. 2023 threw a number of curveballs at US – tech companies that engaged in mass firings and cutbacks, which adversely affected our digital transformation business; a banking crisis that knocked out the First Republic Bank, a significant client; a B2B recession as clients held back marketing and digital projects, fearing a recession that was always around the corner; rising interest rates; an auto strike that froze auto marketing; and a writers’ strike in Hollywood that downed our entertainment research business.

Throughout this, we stayed on our mission, bringing costs in line, installing central data and information systems, expanding our presence and footprint in the industry, winning new business, and now just about all of those negative factors are in retreat, and we’ve returned to earning over $100 million of EBITDA a quarter, even in a low point of the political cycle. As we head into the end of the year, we believe we’ve reached a key inflection point for our business, and we expect to return to modest net growth, excluding advocacy in the fourth quarter and stronger growth in Q1 2024. We’ve already returned to growth in most areas of the business. 2024 offers a significant number of tailwinds that allow me to call the bottom here. First and foremost, we will have trimmed our costs to be well positioned to hold and expand our target 20% plus margin next year.

Tech companies are coming back and starting to spend again. AI offers a whole new class of digital transformation work. We have the engineers to implement. Fear of recession seems to be easing in favor of a soft landing. The political season will be a record one. The strikes are all ending. And digital spending, ad spending is expected to grow. Since our last earnings call, we’ve made significant progress to manage our costs and to advance our long term strategy. Cut a further $34 million of annualized costs from the business as we right-size our staffing cost structure as we look ahead to 2024 and announced a divestiture of ConcentricLife to Accenture for $245 million in cash. We also accelerated digital services through acquisitions, including Left Field Labs, a cutting edge digital transformation company, leveraging AI and AR to create truly innovative digital customer experiences, and Movers + Shakers, a disruptive creative agency renowned for its social and emerging platform capabilities.

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Q&A Session

Turning to our results, Stagwell posted third quarter net revenue of $535 million, down 3.8% from the prior year. We saw continued momentum in the Performance Media and the Stagwell Marketing Cloud was both posting double-digit net revenue growth year-over-year. And we returned to positive net revenue growth in our creativity and communications capability this quarter. Strong performance in these businesses was offset by challenges in 2 and consumer insights, particularly our entertainment research firm. Perhaps most importantly, we continue to deliver strong net new business, capturing more than $81 million in the third quarter, maintaining our strong momentum from the second. Our net new business figure of $155 million is a company record for back to back quarters.

Clients leaving us is down to a record low of $7 million. So our client base is expanding, setting us up well for an economic recovery. The orientation of our business towards our largest, most impactful relationships continued in the third quarter. Our top 100 customers grew 18% year-over-year, with three customers exceeding $15 million of annual spend in the last 12 months. International also continues to be a real bright spot for our business as net revenue grew overall 25% in the third quarter. Organic net revenue from our international business was 15%, led by outsized growth of 14% in Asia and 16% in EMEA. This performance speaks to the benefit of continuing to diversify our business internationally, a core tenet of our overall growth strategy.

In the last few weeks, we’ve added to our affiliate network, partnering with Markus Agency in Vietnam and Clarita in Brazil, allowing us to expand our reach in these regions. We also, earlier this year, acquired Huskies, an Irish digital agency, and are exploring further acquisitions that will expand our reach in Latin America, Europe and the Mid-East. Our adjusted EBITDA came in at $102 million or more than $10 million sequential improvement over the second quarter and representing a margin of 19%, a 210 basis point improvement over the second quarter and a 520 basis point improvement since Q1. This is a direct result of the actions we’ve taken to right-size our staffing levels, steps that have led to an $82 million annualized reduction in staffing costs.

Our staff costs as a percentage of net revenue currently stand at 63.4%, a 360 basis point improvement since the end of the first quarter. As we’ve trimmed our costs, we have continued to invest in key growth areas. The Stagwell Marketing Cloud is one such area and our EBIT DA would be higher if not for the $8 million OpEx investment we made in the area during the quarter. We posted $0.18 of adjusted earnings per share during the quarter, a 13% improvement sequentially. Stagwell now expects to generate $390 million to $410 million of adjusted EBITDA in 2023. This should translate into about $0.73 to $0.78 of adjusted EPS. We expect overall organic net revenue growth to be about negative 4% excluding advocacy. Organic net revenue growth is expected to be about negative 2.5%.

Given the litany of event occurring this year, this temporary retrenchment is a testament to the resilience of the business and its ability to meet its long term growth targets. Our agencies continue to be recognized for their market transforming work. Just last month, Colle McVoy was recognized as the Midsized Agency of the Year, and GALE, our business consultancy, crowned the number one fastest growing large agency, both by Adweek. Additionally, Code and Theory, our leading digital transformation agency won a highly coveted Fast Company innovation by Design Award for its brand and technical work, for Getty. If 2023 has been a year of efficiency for the tech companies, we believe that 2024 will be a year of competition for them. The last few years have seen the biggest tech companies move from their previously defined areas of strength to compete directly against each other in areas like the cloud enterprise, productivity products, hardware and AI, which has brought another area of competition which these companies will have to address.