Q1 2023 Stagwell Inc Earnings Call
Sure.
Mark will provide a business update and then Frank will share our financial review after their 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 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 stack well global Dot com forward slash 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 .
Thank you Ben and thank you to everyone for joining us for our earnings call.
<unk> is an important date for segro, its future and for its investors.
<unk> announced that several inc.
<unk> into a definitive agreement negotiated by a group of independent directors advised by legal and advisory teams to repurchase over 23 million shares of stock in class a stock from Alpha invest this move will not affect the float but will reduce the number of shares outstanding by 8% to about $267 million.
And should avoid the necessity of any further secondary issuances in relation to exiting <unk>.
In addition, as part of a separate release from the <unk> group the remaining investors instead, what media of step down.
And are in advanced negotiations expected to go to final documentation soon to redeem any remaining spec home media LP interest.
I believe these actions will remove an overhang from the stock.
Let me address Q1 earnings. These results are in line with management's expectations for the quarter, especially when compared to Q1, 2022, which featured an extraordinary 24% organic net revenue growth far above the 14% average last year.
This means that performance that would be growth compared to the average of last year is overshadowed by 2020.
22, Q1, this math will work in reverse in the last two quarters, which we expect to show double digit growth.
Remember that Q1 2023 at the bottom of the four year political cycle.
Time of investment in building up our marketing cloud is in the face of Tech company slowdowns and as compared to our strongest previous quarter of growth.
We rang up $622 million of revenue and $522 million of net revenue this quarter revenue ex advocacy increased by 1%. After a 31, 5% increase last year and net revenue ex advocacy increased by 1%. After a 23, 5% increase in Q1.
2022.
As expected advocacy revenue declined 42% on a purely organic basis net revenue ex adequacy declined 1%. After a 23% increase last year. The two year stack of 21% net organic growth is on target with our long term growth targets.
While we do not give quarter by quarter guidance, we reaffirm our previously issued guidance for the year and organic growth target of seven 5% to 10% for the year.
Why do we have confidence in that given the headwinds previously noted of slowing tech companies and a slowing economy.
Two important reasons growing new business wins and increased industry recognition of stag grow and it's great companies is at the forefront of modern market.
Net new business for Q1 is a $53 million in line with over $212 million of net new business over the last 12 months and consistent with continued client growth.
After the close of the quarter. However, the company has wrapped up an additional $40 million of new wins in April alone as important pitches that we're holding back in Q1 broke in our favor.
Notable wins during the quarter included T mobile it could in theory sleep number of 72 and Sunny Brooks earnings at Assembly row staggered.
<unk> also expanded its public relations remit with U S steel.
<unk> business with the National Restaurant Association.
The April wins included a major European cosmetic companies for Assembly and American fast casual restaurant chains, creative advertising and new assignments at Microsoft and Google, which were good signs on the tech companies beginning to make a comeback.
Industry recognition.
We're a company with less than 2% market share has been exceptional.
Anomaly was previously named <unk> 2022 agency of the year and listed as one of the 10% agencies on AD Age's. Most recent a list.
This year, Gail, which grew 140% last year and is off to another strong start a 11% growth in 2023 was named Ed breakthrough Media agency of the year number five on AD Age's, a list and is running a path breaking campaign now.
Based on the idea of wooden milk.
The donor partner network was named a standout agency of the year on the <unk> list as well and just last week Allison and partners was named the <unk> North American agency of the year, We have top award winning brands digital transformation advertising media and PR far above our market share, which is why we continue to have.
Have a strengthening pipeline that we expect to exceed 2000 $22 billion in inches by 20% or more.
We will watch closely two important segments of our business the tech industry, which is 18% of our net revenue and grew 32% for us in 2022 it.
It grew only 3% in Q1 as these companies went into slowdown mode, but we still manage some growth out of them.
We're seeing some lifting the curtain there now as tech earnings were solid this quarter and generally AI, except to bring on a renewed competition in marketing in the tech industry.
The new generation of products and experiences.
The second industry finance and banking, which is about 6% of our business and grew 10% in 2022. This.
This industry declined 3% in the quarter, we had no silicon Valley Bank exposure, but we did have first Republic bank as a digital platform client, but we also have jpmorgan they require as a major client our exposure here is limited.
We posted an excess of $72 million of EBITDA. This quarter in line with our internal expectations comparisons to last year included a one time $5 million rent credits lower levels of investment in the marketing cloud and the addition of cloud related companies such as Meru, an epicenter data of the carried revenue, but are still scaling to generate EBITDA. We also.
Face some slowdown from the tech clients and kept teams intact as these companies typically come back as they reorganize after capex.
As clients are moving from capability that capability. However, we have taken out about $25 million in annualized cost savings that will hit in the second quarter and are taking out an additional $20 million. So it will hit in the third quarter and this ability to make such shifts gives us confidence to reaffirm our guidance on EBITDA for the year and returns to normal margins.
Business ramps up and political work begins in the second half of the year heading into the presidential election.
As noted previously our central systems are coming online in midyear and that will enable us to kick off a plan next $35 million in central expense reductions based on the deployment of increased automation and AI across the company, but especially in our media operations.
This quarter was uneventful in terms of debt and liquidity as this is the time of the year that bonuses taxes and earn outs are paid so that our position is consistent with previous years, we expect to be at about 225 times net leverage at the end of the year with normal MMA, M&A activities and including the $23 million.
Their stock buyback transaction.
During the quarter, we took several internal moves of significance, we combined our health companies into concentric lagged to give them greater scale and efficiency. We just added in the company of Husky's in April a digital first creative marketing company in Ireland, which strengthens our European offerings, and we combined several smaller but high powered agencies to relaunch.
Crispin Porter Bogusky brand at scale under the leadership of Brad Simms and Maggie Malik.
With a wealth of talent, Christopher and is already getting access to larger new pitches are strategic combination of digital creative and media as represented by the brand performance network. So it's a new paradigm that is the key to disruptive competitors.
Importantly, we continue to ramp up our commitment and development of our products known collectively as the stag oil marketing cloud.
Starting next quarter, we intend to break out the finances of our card group, which involves two divisions pure software plays that represent about $65 million of expected soft software net revenue growing over 30% this year and the advanced media platforms that are about $170 million in net revenue and growing at 12%.
We expect to invest up to $20 million. This year in cloud development as we build the media studio products that will provide us with full capabilities of the trade desk could more and we infuse that through our network and make it available externally later this year.
We'll be fully deploying AI tools across all our agency I believe it will over time significantly enhance efficiency.
We will be ramping up the sales forces of three key products that are available right now around the augmented reality stadium experience already delighting fans in four major stadiums across through sports leagues.
The Harris brand terminal with over 120 clients growing 100% last year and an average subscription of $60000 a year.
And profit generative AI product was recently honored with the prestigious PR industry Award for its innovative software profit.
Profit just announced its partnership with Lexisnexis to expand its journalists and content database.
I invite you to go to Www Dot key our profit Dot AI, that's www dot PRP R over P. H E T.
And sign up for the freemium edition and try it out yourself.
It represents the staggering edge and our ability to use and deploy advanced high value state of the art technology.
Lastly, let me note that we just announced prudent series partnership with Oracle to co develop generative AI applications across verticals. This is the first of what will be many partnerships with major tech companies recognizing that we have the scale and expertise to work together to establish new products and services for their clients and the consumer marketing.
Space.
This is a new direction for us and Cogent theory is taking the lead here in.
In closing, we're really excited about the <unk> transaction, we announced this morning, we simplified our share ownership structure eliminated some uncertainty and done so in a way that creates value.
We'll be relentless and working to get full value for our shareholders.
We have I believe the world's most talented group of managers and professionals in 34 countries, combining creativity and technology through Pandemics near receptions Tech slowdowns, we never stand still at Ciber, we're continuing advancing and scale growing with new clients building, new technology and moving onward in 2020.
Tim.
Now I'd like to hand, it over to Frank Menudo, Our Chief Financial Officer to walk you through some of our financial results in more detail.
Thank you Mark good morning, everyone and thank you for joining us to discuss our first quarter results.
As a reminder, if you would like to ask a question at the prepared remarks conclude please feel free to submit them through the chat function.
I'll start by reiterating Mark's earlier comments that results for the first quarter were in line with our budgeted expectations and consistent with our year end remarks that the first half of 2023 would have lighter growth.
This is principally attributed to a shift in phasing of client spend.
And to a lesser extent, the biannual cycle of our advocacy business and finally to our extraordinary growth in Q1 2022.
Which was uncharacteristic given our historically stronger second half performance.
This latter point is evidenced by the strength of our two year organic net revenue stack up 21%.
We expect a pickup in client spending in the remaining quarters of the year and have already begun to see signs that this is happening.
With that let me turn to the numbers.
Starting with our reported results our Q1 revenue was $622 million.
A decline of 3% on the same period in the prior year.
Net revenue excluding pass through costs declined 9% year over year to $522 million in.
In organic terms the decline was 3%.
Turning to results by principal capability digital transformation organic net revenue declined 9%. This.
This was principally attributed to the expected cyclical decline in our advocacy business excluding.
Excluding advocacy the organic net revenue decline was 3%.
The remainder of the decline is largely attributed to the trends that mark spoke about in his prepared remarks, namely hold back from spending as companies restructured their workforces.
On a two year basis, our digital transformation capability has seen organic net revenue growth of 40% or approximately an annual growth rate of 20%.
Performance media and data so a 5% growth in organic net revenue this.
This growth was driven by strong performance from our ink and assembly businesses again looking at the two year stack performance media and data has grown 23% or 11, 5% on an annualized basis.
Consumer insights and strategy, so a 1% growth in organic net revenue coming off an exceptionally strong 56% growth in the prior year.
And finally, our creativity and communications segment, so a 3% decline in organic net revenue in the quarter.
But once again looking at the two year stack growth was 6% or 3% annualized which is consistent with our projections for this capability.
As you can see by reviewing the results over the two year period, our growth rates remain strong and are higher than our primary competition.
Moving to costs, our operating expenses increased 3% year over year to $606 million in the first quarter.
Our compensation to revenue ratio came in at 67% in the quarter, an increase of 230 basis points versus the same period in the prior year.
The increase in the compensation ratio is driven principally by the temporary softness in client spending we experienced in Q1.
Our brands have already taken action to reduce compensation expenses to align with revenue.
We eliminated more than 300 roles in the first quarter, which will generate approximately $25 million in annualized savings.
And as Mark highlighted we will take further action this quarter, which should result in additional run rate savings of approximately another $20 million.
We will continue to monitor performance over the remainder of the year and if necessary, we'll make further adjustments.
G&A expenses increased by $15 million or 18% year over year. This was driven principally by the addition of eight post Q1 acquisitions during 2022, representing approximately $6 2 million or 41% of the.
<unk>.
Higher <unk> of $3 3 million or.
Or 22% of the increase as business travel has returned to near pre pandemic levels and finally, the non recurrence of approximately $5 1 million and favorable subletting arrangements of certain real estate properties, representing 34% of the increase.
As a result, adjusted EBITDA came in at $72 million.
Ahead of our internal budget for the quarter.
Net income attributable <unk> available to common shareholders decreased to $443000 from $12 7 million in the prior year principally attributed to the decline in operating income that we discussed previously and.
And finally earnings per share were negative <unk> <unk> and adjusted EPS was positive <unk> for the quarter.
Moving to the balance sheet deferred acquisition consideration obligations increased slightly by $4 million from year end to $166 million.
Due to the higher performance of the businesses under earn out.
But it was lower year over year by $59 million.
Or 26%.
As the company remains on target to reduce DAC to less than $100 million.
By the end of 2023.
We also acquired two 6 million shares during the quarter.
At an average price of $6 91 per share.
Approximately $18 million.
Under our recently expanded stock repurchase program.
As a result, we ended the quarter with cash of $139 million and drawings under our revolver of $150 million.
Our leverage was 263 times as compared to $2 72, a year ago.
We remain on track to achieve our stated goal of <unk>.
Bringing leverage down to two times over the medium term.
And finally on May 4th we.
We exercised the provision and our revolving credit agreement and expanded the credit limit to $640 million from $500 million.
We took this opportunity to raise our credit limit as it provides the company with additional borrowing capacity and flexibility to pursue our business goals.
<unk> structure and primary covenants remain unchanged and we expect to utilize the revolving facility.
To fund the repurchase of more than 23 million shares for approximately $150 million.
From out the best.
Upon closing the transaction will be accretive to future earnings per share.
And finally moving to our guidance, we are reiterating our full year guidance, including organic net revenue growth of seven 5% to 10%.
Organic net revenue growth, excluding advocacy of 10% to 14%.
Adjusted EBITDA of $450 million to $490 million.
And adjusted earnings per share of <unk> 90.
To $1 five sites.
That concludes our prepared remarks for this morning, I will now turn the call back over to Ben Alison to open the Q&A portion of the call.
Thank you Frank just to remind if you have any questions. Please submit them via the chatbot and off the top of the screen.
We will start with a question from Laura Martin at Needham could you. Please share your view of how generative AI like Chapped GBT will impact our business moving forward.
I can think I think you can see.
From the earnings report I gave that we view this as a major opportunity for us.
We already have the tech companies as major clients, we have a significant engineering culture. We have released profit, which is a generative AI engine already in the marketplace. We are combing through every possible application that we can from.
From helping creators, helping annualized research and to apply these new tools as quickly as possible across our network I believe that our ability to utilize that will be one of our differentiating features.
Great and as a follow up to that digital transit is also Furthermore, digital transformation revenues were down 9% year on year in the first quarter of 2023 and this is your most profitable segment do you think this is a blip or should we model. This is a new run rate.
We see this as a blip.
1% to 9% includes.
Because see when you take advocacy out it was negative 3% and that's as I reported throughout that.
Tech companies laid off a lot of people usually then they have to reorganize and foods in charge of things and figure out which projects are going forward, where we see them beginning to unfreeze now that's why we decided to keep our teams because of the importance of those kinds of teams and the difficulty of retiring them right through this.
We see it coming back we believe that that was that negative 3% was a blip that will undo itself and the later parts of the year.
On a related note a question from Jeff Van syndrome at B Riley as you look across your various business segments and niche within the segments, where are you seeing the most growth.
Areas are you most optimistic about in the near term.
Also what areas you're increasingly.
In the data.
Well look I really see that research always continues to surprise look they had growth.
56% in the previous year of Arris brand terminal.
Really doing quite well the greater uncertainty out there I think is very strong for research I think digital transformation. So it's something of a slowdown I think thats from here going to show significant growth as clients turned to that much clients want generative AI and other new features.
Slide.
I think the sweet spot of where we are seeing.
Large scale, new pitches is in our brand and our brand performance network, where we're combining creativity with media.
And I think that is really a standout area for us and I'm always concerned about about creative on its own that's why our creative companies are all getting the capability to link creative and media in the future that seems to always have been the while the most interesting and fascinating part of the industry. It's in some ways generally.
The smaller growers relative to that but we believe that the combination <unk> that really that really provides the edge for us.
Related note and some continuing to new business trends a question from Steve Cahall with Wells Fargo.
As of today, what's your net new business looked like since you say you've added to the $212 million trailing 12 months.
Fortunately you referenced.
I think were $2 12 in the last 12 months were $53 million.
In Q1, I don't have a net number for April but that was we had $40 million additional significant client departures that I really know up in April with full calendar about but this is strongest April that we've.
We've ever had with $40 million in the business and that's really what gives us confidence and we're going into con, but you remember last year, we got a lot of new business coming out of <unk> and we've also kind of even increase with something called sports HR presence.
This year to be a major player.
Great had turned a little bit to the cloud, obviously, you announced that we're going to be breaking out different segments, you cycled Lumpkin cloud next year or next.
Quarter.
Question for Mark Slaughter weights over Brent benchmark could you explain a little bit some of the cloud related investments in the quarter and how should we think about the margin impact of incremental marketing.
Marketing cloud revenue in 2023 and onwards.
Sure.
I think that.
We've made significant investments in putting together the media studio applying generative AI going to the next versions of profit.
We're in the midst now.
Putting the meru experience together with the Harris brand terminal into a unified research offering so we're making commitments and investments in that.
I believe that is it.
Pointed out that we'll spend up to about $20 million refining it on some of the products now we are ready to go to market I think can expand the marketplace.
Pirates brand terminal profit around and so there were not investing in engineering, but we will be investing in sales forces I think that 2023 is going to be a year of investment. We expect significant revenue increases in 2024, having said that we still think there's a 30% revenue increase within.
The marketing cloud software components themselves and double digits within the advanced media platforms, but I think youre really going to see the profitability out of that ramp up in 2024.
Great and just to remind to everyone. If you have any additional questions. Please do put them into the chat function.
Which is going to turn quickly to question from Barton Crockett from Rosenblatt.
Could you talk a little bit about your approach to guidance why didn't you guide more specifically for the March quarter.
And to providing our full year outlook could.
Could you approach change in the future.
I don't think we want to get into the business of quarter by quarter guidance.
And marketing Thats, just a lot of lumpiness in quarters clients tend to shift things around.
Considerably we get there by the Hampden.
We get there by the end of the year and I think trying to refine guidance to quarter by quarter.
As I think.
As a risky proposition I think we might have pointed out somewhat more of a high comp in Q1 relative to the normal the normal structure in effect.
I pointed out in general what Ive CSC as the more normal structure for this year.
Particularly as as tech companies come back and political ramps up in the second half of the year.
Great and another question from Boston and this is on the share repurchased use for out invest can you just give us a sense of how many shares this could represent and how this fits within your broader share repurchase approach could you also address your own small and <unk>.
Thanks, Matt.
Well, it's $23 million.
$23 million three.
Shares, reducing our share pool to $267 million.
Our advanced negotiations and which Steve and I would take any remaining intra.
Interest that <unk> has in the fund that would not change the the share increase and obviously in no way is as Mike share decreased and any of the proceeds.
Purchased today go to <unk>.
Up invest and if anything.
Holding stay the same or might after this process increase.
Great and I think one final question is from Nick Zheng over at Stephens.
Encouraging progress with around lending yet another client with the in the Cleveland Cavaliers at multiple teams for multiple leads now partnership can you talk a little bit about monetization on a team by team basis tablet.
Well I think with all pet products first half to have an experience and you have to have an experienced people like and enjoy unused time on and then you have monetize as I always say.
First it was TV than there was television advertising and Thats. The phase were in now we have.
The goal is to get about $500000 sponsorship revenue per stadium for season, we.
We've started with the first sponsor or two and again as the technologies established as people see that 10 or 15% or more of the fans are spending.
<unk> minutes for half hour on the experience that creates the ability to monetize it and then also for us to build custom sponsorship experiences a cobranded snowball fight against all of the customers. So we think Theres high promise there.
We're also getting permission from believes in order to sell.
Shell sponsorships right now we have the permission within several of US several of the stadiums and so we're just rolling out that.
Alan I think off more progress to report as we go on later in the year.
Wonderful.
That's the end of our questions for today I just wanted to say a big thank you to everyone for attending.
Half.
Jason and a few other members of our management team will be attending some conferences in the coming weeks, we hope to see that meetings of the map I think thank you and we look forward to seeing on the second quarter call in August .
Thank you.