Q4 2021 Stagwell Inc. Earnings Call
Businesses, which saw an expected decline as they lap the twenty-twenty elections are 2021 growth was even more impressive as GAAP revenue grew 18, 2% and net revenue increased by 20% year over year with 18% organic growth are.
Topline growth allowed us to continue to grow our pro forma adjusted EBITDA.
Which has $378 million for the year, not including synergies versus an initial guidance of $325 million to $340 million exceeding the midpoint of that range by $45 million.
This represented 20% year over year, adjusted EBITDA growth and 41% growth when excluding advocacy and was a 19, 6% margin on net revenue.
Our robust margins were the result of continued diligence around costs, which were outpaced by revenue growth and a strong performance across our digital capabilities.
As we projected more than 50% of our EBITDA converted to free cash flow, which we expect to be even higher this year.
Growth was broad based across all of our principal capabilities, especially our digital capabilities, which are digital transformation performance media and data and consumer insights and strategy.
Our digital transformation businesses grew 25% organically year over year, driven by more than 40% organic growth at our non advocacy agencies, the largest being coding theory, Gail instrument and Y M L.
The digital acceleration during the pandemic continued as clients allocated more of their budgets to transforming their marketing businesses digital platforms and applications turning to stag will for design and engineering excellence at scale.
Our performance media and data capabilities grew more than 10% organically in 2021 with building momentum through the year delivering 31% growth in the fourth quarter driven in part by large contract wins at Assembly.
The wins come on the back of the consolidation of digital marketing agency forward Pemex under the assembly brand, creating a scaled omnichannel powerhouse with cutting edge data and technology.
Assembly now generates more than 75% of its revenue from digital channels.
And it's digital first offering is resonating powerfully with bigger clients looking to consolidate media partnerships as the landscape becomes increasingly complex.
The creation of the Stag won't media network has not only provided the scale to service larger accounts, but to do so more competitively we've been able to start signing commercial and strategic deals with the largest global advertising platforms, giving our agencies earlier access to AD platform innovations exclusive access.
To premium inventory for our clients and enhanced training only provided to the largest media buyers.
Our consumer insights and strategy businesses grew in excess of 40% organically with particular strength at the National Research group, which had a record year across all of its top 10 clients and include the biggest entertainment and technology companies in the world.
Over the past few years NRG has become the premier data and analytics driven consultancy for content creators streamers and big Tech, providing crucial insights that drive content optimization product innovation and marketing strategy.
We also saw similarly strong growth at the Harris poll, driven by increased demand for its brand insights and strategy services as well as its Harris poll brand platform, which allows clients to track consumer brand sentiment in real time against their competitors.
Our creativity and communications capabilities grew 7% year over year with strong growth across our public relations practices.
Recovery and experiential and strength at our flagship creative agencies, such as anomaly, which is forging a path of creative evolutions with our design innovation and transformation assignments, leading to growth of clients like the ASEAN, Google New business with next Bresseau, Amazon and Duncan just to name a few.
Our creativity and communications companies helped open the door to key larger wins.
Turning to new business, we continue to build on three consecutive quarters of strong new business generating a record $75 million of net new business in the fourth quarter.
During 2021, we won eight contracts that we anticipate will generate more than $10 million in annual revenue each within the ninth soon to be announced at the start of the year as Assembly was awarded multi region media duties for a global Fortune 500 technology company.
We also significantly expanded our relationships with several high quality blue chip customers like Nike, Google Amazon Apple Novo Nordisk Abbott Labs, Johnson, <unk> Johnson epic games and added a slew of fantastic clients like Duncan legal zoom in Q health as well as two new fortune 100 clients and.
<unk> and health care services.
Nothing demonstrated the stag will energy better than our Omnichannel work around the Super Bowl, we ran seven ads during the big game for clients ranging from better to Pollstar to Expedia and for the NFL.
In addition, we did numerous digital client activations, including work for Captain Morgan milk, Pep Budweiser and Groupon.
We also continue to receive strong industry recognition Allison and partners brought home the title for the best in show at the provoke Saver Awards and they work for Budweiser, one across all categories in which they were shortlisted.
Announced just this morning Creative Agency Observatory has been named for the third year in a row to fast company's list of world's most innovative companies for its work with Chipotle, Nike Netflix and more.
Our investment team has had an active year as well as we closed the transformative combination and quickly turned our sights to investing for the future in December we completed the 100% acquisition of good stuff. The second largest independent media agency in the U K, which was recently awarded campaign magazine.
Uk's prestigious agency media of the year Award.
The strategic transaction brings deep expertise in offline media buying and planning that will complement assemblies digital capabilities in Europe , allowing the media network to deliver Omnichannel excellence in the region critical to win larger contracts.
Also in December our strong cash flow allowed us to acquire the remaining 49% of instrument one of our fastest growing digital transformation design agencies.
We were able to fund these investments, while reducing net debt to 2.8 times LTM adjusted EBITDA at year end.
We also made key investments in new talent to lead the stag oil marketing cloud, bringing on a geiger as the chief product Officer, Hauswirth roller as Chief marketing Officer, and Matt Lochner as managing director.
This team of proven digital product and marketing leaders will drive SaaS and Paas innovation for our suite of technology products, We're building to support our clients in house marketing transformations and leveraging emergency emerging technologies.
In January we launched around an augmented reality tool for live sporting events, which we showcased at CES.
While it's still in its very early stages. We are pleased to welcome the new leadership team to take us until lift off phase of the stag while marketing cloud.
Looking ahead, we've had a strong start to the year and are expecting pro forma 2022 net revenue growth of 18% to 22%.
And 13% to 17% when excluding advocacy and adjusted EBITDA of 450 million to $480 million, which is expected to be back half weighted given the normal seasonality of our non advocacy businesses amplified by these significant back half weighted.
<unk> and our advocacy businesses, which typically see strong growth in the third and especially fourth quarter of an election year rare.
Relative to net revenue, we expect GAAP revenue growth to exceed net revenue growth by mid single digits due to the higher pass through costs and our advocacy businesses. We also anticipate a strong year for free cash flow, which we expect to grow approximately 30% versus 2021.
We plan to use roughly one third of this cash flow to fund existing M&A, one third to fund new investments in our global presence digital capabilities and the stag oil marketing cloud.
And keep one third to continue to deleverage with a new long term target of two five times net debt to LTM adjusted EBITDA.
Further deleveraging will continue to strengthen our balance sheet and provide increased capital flexibility.
We're also considering a plan to allow for buybacks to offset dilution from equity issuance related to compensation or investments.
Unlike our legacy competitors our growth is continuing to soar and is driven by our high digital concentration upside in the stag won media network large wins at our flagship creative agencies unique exposure to strong secular growth in advocacy and recovery to new growth in our trash.
<unk> business.
But most importantly, we've seen a significant shift in the understanding and appreciation for the stag will story in the industry, which has led to a notable improvement in client retention, which is allowing our larger wins to drive real growth.
Our positive momentum is also helping us better attract and retain talent during a challenging period for the labour marketing positioning us for a successful 2022.
If you've missed some of what I've said.
Or find these calls rather dry we've put together a video to highlight our year.
And then we will be hearing from our CFO , Frank Lanugo with some additional details on our performance.
2021 was a breakthrough year for stag well the challenger network built to transform marketing recombined schedule marketing group at MDC partners together, creating the world's newest top 10 marketing services firms with 10000 people in 34, plus countries 1200 Engineers 4000 Blue chip.
Clients.
Our pro forma net revenue grew 15% organically and 18% ex advocacy to nearly $2 billion, we delivered $378 million and adjusted EBITDA.
We built a value creation platform with strong margins and cash flow.
Three factors drove our success.
Our digital business grew net revenue, 29%, excluding advocate achieving scale and the fastest growing areas of the market.
51% of our net revenue came from digital capabilities, we made key acquisitions of industry innovators and build a global affiliate network with over 50 partners bigger more impactful wins, including numerous contracts north of $10 million and we do.
Did more than growth, we strengthened our balance sheet refinance bonds brought leverage down we earn credit upgrades from Moody's and S&P.
What was the results great work for clients.
Unique opportunities for our talent and tremendous value for shareholders. The best part is we're just getting started scaling the stag oil marketing cloud a proprietary suite of SaaS products greenhouse marketers expanding our technology leadership with investments in our core digital platforms, creating a culture of collaboration.
To scale, our global reach there is no other company in marketing today offering this combination of talent technology and growth 2022 guidance as of March eight of 2022.
Join us.
Thanks, Mark and good morning, everyone. We're pleased to have you join us today to discuss our Q4 first post combination results.
My comments today will include unlimited the discussion of our GAAP results, which will be supplemented with pro forma combined results as if the business combination took place on January one 'twenty.
The supplemental pro forma results provide useful additional information to help evaluate the company's performance.
Revenue for Q4 was $612 million.
First 313 for the same period in the prior year or.
Or an increase of 161%.
Our full year revenue was $1 7 billion versus 888 million for the same period in the prior year or an increase of 65%.
Okay.
Net revenues, excluding pass through costs was $1 $2 7 billion.
$633 million in the prior period or an increase of 100%.
Adjusted EBITDA for Q4 was $104 million or 64 million the same period in the prior year or an increase of 61%.
So on a full year adjusted EBITDA was $254 million.
First 143 million, but the same periods in the prior year or an increase of 77.
The remainder of my comments will now focus on the pro forma results of the combined company.
The fourth quarter.
Revenue for Q4 was $612 million.
641 million in the prior year.
Or a decrease of four 6%.
Driven principally by the absence of pass through costs political wildfire.
Excluding advocacy revenue was up 18%.
Net revenue excluding pass through costs increased 10% to $520 million.
<unk> hundred $71 million in the prior year.
Excluding advocacy net revenue was up 20%.
For the full year revenue increased to 222 billion.
2.09 in the prior year or an increase of 6%.
Ex advocacy revenue increased 8%.
Yes.
Net revenues, excluding pass through costs increased to $193 billion.
166 billion in the prior year or an increase of 16.
Pat.
Ex advocacy net revenue increased 20%.
On an organic basis net revenue increased by 11, 3% and 14, 5% for the quarter and the full year perspective.
We report our revenue by both our reportable segments and Opentable capabilities.
As Mark already discussed our principal capabilities in his remarks I won't repeat the details here other than to note. We have reclassified our principal capabilities into four categories included.
Digital transformation.
The oldest media and data <unk>.
Consumer insights and strategy and creativity and communications.
We have selected this aggregation of our revenue is most reflective of the nature of the services that we're providing to our clients.
And with that let me turn to our segments.
We have three reportable segments, consisting of integrated agencies network.
Media network and the Communications network.
Beginning with integrated agencies, our largest segment.
Organic net revenue grew by $43 million and $189 million or 15%.
And 18% in Q4 and sort of full year, respectively, driven by strength in digital integrated pitches and larger contract wins.
The media network increase is organic net revenue by 34 million and 63 million or 36% and 17% in Q4 and for the full year, respectively, driven by several $10 million contract wins as well as demand for digital services and our travel.
Related business.
And our organic net revenue in our communications segment decreased by 22 million or 9% for the full year as expected as 2021 was an off cycle election year.
Excluding advocacy the communications segment grew by 10% for the full year driven by strong demand for strategic communications.
Turning to our costs, excluding our cyclical advocacy businesses, we expanded our margins for both the fourth quarter and the full year.
Adjusted EBITDA in Q4 was $104 million.
$190 million, a year ago down, 5% with an EBITDA margin of 19, 9%.
Excluding advocacy adjusted EBITDA increased 31% with margins of 18, 9%.
From 17, 3% a year ago.
And sort of full year, adjusted EBITDA was $378 million.
<unk> $316 million, a year ago up 20% with margins of 19, 6%.
Excluding advocacy adjusted EBITDA increased 41% with our EBIT margins rising to 19% from 16, 1% in prior periods.
The quarter does not include any significant impact from synergies or the cost to achieve which we expect to pick up more materially in the current year.
We still expect to achieve approximately $30 million.
Run rate synergies from the combination over the state of <unk>.
Moving to our balance sheet during the quarter, we took additional steps to improve our financial position and manage leverage.
We entered transactions to acquire the remaining interest we did not already own in three subsidiaries, including instrument digital design and transformation business.
Targeted victory, a digital advocacy business and concentric our health care business.
The company also acquired good staff, a new case excuse me a UK based media agency during the quarter.
In total the company made M&A related payments of $50 million in cash and 37 5 million in stock during the quarter and the transactions allowed us to acquire the new and remaining interest not already own so predominantly capped amounts using a combination of cash and company.
Stock.
In total our deferred acquisition cost with Dino Noncontrolling interest and non controlling interest excluding class B shareholders Rose immaterial in Q4 with increases in that and our MSCI offset by a decline in NCI.
Net capex for the quarter and for the full year was $6 million and 22 million respectively.
Approximately 1% of full year revenue in line with our previous estimates.
Moving to liquidity, we ended the year in a strong position inclusive of our previously discussed payments. We finished the year with $184 million in cash and $110 million drawn on our revolver against our $500 million revolving credits.
Our total leverage ratio at year end was three zero or tires.
Putting M&A obligations, our net leverage declined to two eight times from three one times in the prior quarter.
Now moving to guidance for fiscal 'twenty two the company is guiding to pro forma net revenue growth.
<unk> to 'twenty, 2% pro forma net revenue growth.
Advocacy of 13% to 17% and adjusted EBITDA of $450 million to $180 million.
Capex is projected at 1% of revenue and the company estimates that it will increase its free cash flow defined as adjusted EBITDA less interest cash taxes, Capex minority interest distributions and changes in working capital and other by approximately 30%.
For $201 million in 2021 or between $50 to 60% of our forecasted adjusted EBIT.
Our outlook is based on the prevailing macro conditions and does not reflect any significant adverse impact from the invasion of Ukraine.
In closing I'd like to thank our colleagues and business partners that have helped us in accomplishing the many initiatives we have undertaken in 2021.
We will now open the Q&A.
Please submit your questions via the chat button at the top of your screen.
Yes.
Thank you Frank.
The first question that we have in the chat concern Avi Steiner at Jpmorgan.
In light of the guidance with the companies.
First of all bear around year end.
Great.
It depends on.
The level of acquisitions that we make in 2012 mature so I would say that it's possible although not definitive at this point just given the.
The options, we might have on an acquisition side.
Chris Mcginnis at Fidelity and the next question given the success following the business combination.
<unk> seen a change in the competitive landscape in response.
I haven't seen a little bit of a response or seen omnicom and make some acquisitions that were.
<unk> response to the kinds of areas that we're having very strong success.
So I have seen the competition respond I think ultimately, we're gaining share and have an opportunity to continue to gain share because no matter what kind of acquisitions. The large players made they really can't be a 51% true digital assets. The way we are therefore.
Not showing the kind of growth rates that we're showing moving forward after the pandemic.
And a follow up question.
Pandemic happened do you think that changes the growth trajectory on the digital side of the business well I think it's been permanently changed I've always said that I thought the pandemic with a three to five year acceleration of digital transformation and I think from what we're seeing we're seeing continued very strong bookings.
A business and all of the digital techniques as you know we said digital transformation I think those pipelines are extremely strong. We're also seeing kind of online media and about 75% of our media placement online and we're seeing a very strong book of business and the online media I think.
As it becomes increasingly complex deepwater and again, we're also seeing strong on research I think I was maybe a little bit more surprised at the level of research coming out of that out of the pandemic, but all of these things are not stopping not showing any signs of stopping in EMEA are more longer term trends.
Great.
Follow up question.
At Jpmorgan. Thanks for the clarification on the company's Ukraine, and Russia exposure the company see eastern European exposure, and we're honored naira and more directly whether the company is seeing a slowdown in Europe at all as a result of the tragic events in Ukraine.
I think that obviously, we've got significant properties in Europe , we're about 80% U S. I think 85% North America.
So our overall exposure to international markets is something that we're actually increasing rather than decreasing we're pretty limited.
Exposure Eastern Europe .
But again, none of that seems to have been affected in any material way.
We don't see clients clients are often changing their marketing expense I think the impact is.
Is really in the Ukraine, and Russia, and I don't see it in terms of our business really expanding beyond that at this point.
Okay.
A question, Doug Arthur Huber research.
Discuss in more detail.
Outlet brand advocacy.
Pending highly contested.
Yes.
Well the outlook is strong for continued growth.
I think.
As people.
In advocacy and really noted what's happening now is the presidential race will set a new bar than the mid terms, we will typically equal the last presidential race and then the next presidential race will set yet a new farmer.
Europe's been involvement.
This is this is not just a cyclical market. It is a growth market and certainly having.
House and Senate really so close to <unk>.
The amount of activity here is really going to be I think at an extremely high level and I think the model of the mid terms being a presidential and then the next presidential setting and the environment is likely to continue at least through the next cycle here.
Okay.
And Thats a question to.
Can you. Please explain the one time stock based compensation charge.
Certainly.
That charge was taken.
Part of the transition.
Two employees of the former <unk> group, it's important to note, though that that stock based compensation charge is an accounting charge, but there were no new shares issued from the company. It was actually paid from the proceeds that several media receipt in the exchange during the merger.
No additional shares issued but thats the accounting treatment quarter.
Yes.
Another question from.
The unnecessary airline how has wage inflation impacting your overall operating budget.
Again, I think we've taken that into account as we move forward I think there is obviously wage pressure. We are a people business I think that however, there is high demand for the services. So I think that to the extent there is wage pressure I think that would be reflected.
<unk> relatively short periods of time with.
With clients and increases in the in the general cost of marketing. So I think inflation will affect us, but I think it will affect us in a more or less neutral way over any significant period of time.
Thanks for your question could you. Please talk about the change to the leverage target at terms that are anytime to cheap land side in terms of what drove that adjustment in banking.
I think as we reviewed the previous long term growth targets and I see us going.
Much faster along that curve when I look at that both how this year ended up.
The guidance for next year, we're really making much faster John's and I think that's going to produce more cash.
And then kind of as I reflected the general plan is to use about a third.
Tore.
Existing commitments or paying out longer term about a third for new commitments and then reserve about a third alright and that will that will.
That said with that our new leverage target of two 5% to five also our covenants effectively it would allow us much.
Much greater flexibility in terms of what we will do with that with the growing level of capital.
So I think that's why our revised plan, we're growing faster than expected and generating more cash.
A couple questions about.
About the travel business, just how meaningful that business is.
What is.
Driving the growth there.
I think I think travel in general is not a large part of the business. It's a good recovery part.
It really went from positive to negative factor back to positive, but I think during that period also we were able to move the travel business largely from our print business to mostly online or digital business, we were able to pick up most of the airports grievances CNN expanded 30.
<unk> hundred airports screens without reps NFL games and we are.
We are in effect now run a TV channel reach television with advertising and so I think that's a that's a good business, we hope to see expand over the coming year.
And that concludes our question transact to Martin Ferron.
The income.
Thank you <unk>.
Bank really all employees within incredibly hard year. This year as we as we created the transition to one company, but as one company.
We're on a roll we're bringing together the best.
The talent and the best in technology, and that's being recognized by clients.
<unk> success, and we're going to manage I think.
That success and a prudent.
But successful way to get the right balance between.
<unk> growth.
Margin and security for all thank you very much.