Stagwell Inc. (NASDAQ:STGW) Q4 2023 Earnings Call Transcript

Stagwell Inc. (NASDAQ:STGW) Q4 2023 Earnings Call Transcript February 27, 2024

Stagwell Inc. misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.28. STGW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Ben Allanson: Good morning from Stagwell’s Global Headquarters at One World Trade Center in New York City. And welcome to Stagwell Inc’s Earnings Webcast for Q4 and Full Year 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. 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 to everyone joining us for our fourth quarter and full-year earnings call. With 2023 behind us, we’re ready to return in 2024, a political year to the organic growth that Stagwell showed year after year since its inception, while we strongly execute our strategy to transform marketing through the right combination of technology and talent. 2023 saw a combination of unique factors weigh on the marketing services industry. Persistent worries about a potential recession, rising interest rates, and geopolitical risk resulted in significant restructuring actions, particularly at tech companies as well as meaningful cuts across marketing budgets, add to that a banking crisis and strikes within autos and entertainment industries.

Despite all this, Stagwell grew market share with some of our largest customers, continued to win significant new business, and delivered another year of strong adjusted EBITDA generation by taking prudent cost management steps. We also made significant moves with a lasting positive impact on our business. In the first quarter, we successfully completed a secondary offering, which helped to boost our liquidity. The equity research analyst community has taken note of increased interest in Stagwell after this offering, and we now have eight covering analysts. In the second quarter, we moved to simplify our capital structure and removed an overhang by buying out AlpInvest. This transaction and other buybacks completed throughout the year successfully reduced our share count by 12%.

In the fourth quarter, we completed the sale of ConcentricLife to Accenture for $245 million, representing a sale at 18 times EBITDA and approximately 4 to 5 times our initial investment. This sale of a company that I had never been asked about by investors or analysts is representative of the Company’s underlying value and produced a taxable gain of about $175 million this year. We’ve already replaced the revenue and EBITDA given up by the transaction, while only using a fraction of the proceeds. We believe that modest portfolio turnover at multiples higher than those we pay for acquisitions is a vital part of our operations moving forward. As I previously mentioned, we expect to close another profitable disposition later this year. We also moved to strengthen our services, grow our geographic footprint, and invest in innovation to keep us at the forefront of digital marketing.

See also 20 Largest Chicken Producing States in the US in 2024 and 20 Countries Facing the Biggest Brain Drain.

Q&A Session

We acquired leaders in digital technology and emerging platforms, Left Field Labs and Movers and Shakers. We made our first acquisition in Ireland in the company of Huskies. Recently, we welcomed the digital-first creative collective Sidekick, and our first French creative agency, What’s Next Partners. We grew the Stagwell Marketing Cloud’s capabilities and commercialization path through unique partnerships with tech leaders. We created a partnership with Google to co-build Gen AI solutions and get placement out of our AI-enabled products in their cloud store. And we created a partnership with MNTN, the leader in performance TV to give access to our SMC influencer and content products to MNTN clients as well as help clients in our Media business with performance marketing strategy.

On the third quarter call, I said we were seeing positive signs of a turnaround in our business and expected a recovery over the next two quarters. We saw this unfold partially in the fourth quarter as we returned to sequential net revenue growth. In the quarter, Stagwell posted $655 million of revenue and $551 million of net revenue as we started to see the challenges that have impacted our business abate. For the full year, revenue was $2.53 billion and net revenue was $2.15 billion. Our Performance Media and Data capability continued to post good results in the fourth quarter, growing net revenue by 1% and 5% for the year. Strong performance among our media and buying and strategy brands is leading the group. Those brands posted 7% year-over-year growth in the fourth quarter, their best quarterly growth figure in the last two years.

This strength is offset somewhat by macro-driven challenges in some of our owned media businesses. Importantly, our digital transformation businesses showed meaningful signs of a rebound. Excluding advocacy, digital transformation declined 3% year-over-year in the fourth quarter, a significant improvement sequentially after posting a 17% decline ex-advocacy in the third quarter. We once again grew the size of our relationships with our biggest and most important customers, something we did consistently through 2023. In Q4, our top 100 customers, representing approximately 48% of net revenue, grew 13% year-over-year. Our international businesses also continued their momentum with growth of 3% in the quarter, led by 19% growth in the UK. We posted a very strong quarter of net new business wins over $65 million.

For the last 12 months, we have delivered more than $270 million of net new business at an all-time LTM high. In the fourth quarter, we continued to focus on effectively managing our cost structure so that we’re well-positioned for 2024. On staffing, we took actions in the fourth quarter that resulted in an incremental annualized savings of $16 million. For the full year, we took $98 million of actions, we are seeing the results of the new business gain and cost reductions in a strong January. We also continued our efforts to consolidate our real estate footprint and back office functions, resulting in $4 million of real estate savings and more than $4 million of savings through our Shared Services program. I’m delighted to report that as of the end of 2023, we’ve principally achieved ahead of schedule the $30 million of synergies that we promised.

We are now focused on achieving the $35 million of incremental efficiencies that we announced earlier this year. As a result, we produced another strong quarter of profitability, delivering $95 million of adjusted EBITDA, representing a 17% margin. We did this even while continuing to meaningfully invest in the Stagwell Marketing Cloud. For the full year, we delivered $360 million of adjusted EBITDA, representing a 17% margin. We invested approximately $20 million out of operating funds on development of new technology, an investment I consider proportionate and critical to our future. Our approach to the use of capital remains the same. This year we invested in growth through buybacks, acquisitions, and internal tech development. And we did see expanded media working capital requirements that we’re working to reduce.

Overall deferred acquisition costs are a fraction of the past and were reduced by $60 million this year and are projected to be only about $40 million in total by 2025. We believe leverage will be close to two by the end of the year, but our principal goal is seen through the vision of the company and achieving above-average industry growth. This year, we expect to deliver organic net revenue growth of 5% to 7%. We expect adjusted EBITDA to grow 11% to 25% year-over-year, delivering adjusted EBITDA of $400 million to $450 million. We also expect to convert approximately 50% of our EBITDA free cash flow this year. It’s important to realize that Stagwell started at zero, just eight years ago, and the same energy we put in then is at work today in molding this company to be the next great company in marketing, going from global full-service to platform self-service.

That means we have at play critical strategic initiatives to generate above-industry average growth to widen our margin. First and foremost is to grow our market share — to grow our share of market by expanding our global and technology footprints. This has been evident in our new acquisitions and the steady stream of awards, our agencies whose creative work with the Super Bowl far exceeds our relative size, with five national in-game spots and more than a dozen other client campaigns for the NFL, ETrade, Paramount, United Airlines, Diageo, Budweiser and more. As a result, Stagwell’s agencies have been invited to more RFPs with bigger accounts. Inspiration days with Fortune 100 companies that ask, what else can Stagwell do are becoming nearly a weekly event.

Last year we saw a 20% increase in pitches that we were invited to, totaling almost $1.2 billion. We expect to see similar growth in 2024. Our record-breaking new business wins lay a strong foundation for us to return to growth this year. In the fourth quarter, our digital transformation revenue from technology customers grew by 30%. This resulted from a combination of increased spend from existing customers and the acquisition of Left Field Labs. TMT client are calling our agencies to transform their operations and customer touch points. Stagwell is helping Qualcomm for example to enable the future of AI for developers and across everyday devices, while next month RealClearPolitics will roll out a new AI overlay to their historical polling database that will help user search results in new and engaging ways.