Q2 2023 Stagwell Inc Earnings Call
Turning from staggered global headquarters at one World Trade Center in New York City, and welcome to Stag will Inc's earnings webcast for Q2 2023.
My name is Ben Alison and I lead the Investor Relations function here at <unk> with me today are mark.
<unk>, <unk>, Chairman and Chief Executive Officer, and frankly, new to the Chief Financial Officer.
Mark will provide a business update and frankly share our financial review.
After the prepared remarks, we will open the floor for Q&A you are 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 Companys SEC filings.
Refer to our website Stagno 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 and 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 in the face of significant industry and sector headwinds steigerwalt posted sequential quarter over quarter improvements in revenue EBITDA and margin.
We expect to continue to improve our all metrics throughout the rest of the year as new business wins have continued to accelerate.
As promised for the first time, we will be breaking out the stag low marketing cloud group results this quarter, which show that our investments in that area are paying off and a great potential to enhance our value proposition.
As we strive for a leadership position in marketing AI, our reputation within the industry continues to grow we're being invited to record numbers of new business pitches, we delivered second quarter net revenue of $535 million down about 3% from the prior year, which had increased by 16%. This means.
So we continue to maintain a strong two year stack of growth against our long term targets as we power through this more challenging economic environment.
In this quarter, we continued to deliver sequentially, improving net new business of $75 million following.
Following $53 million in the first quarter and $42 million in the fourth quarter of 2022. This.
This brings our last 12 months net new business to more than a quarter of a $1 billion.
A record for status quo. This net new business won during these periods should stack up over the remainder of the year.
Our largest clients continue to get larger as the top 25 clients showed 12% growth year over year with three clients topping $50 million of net revenue in the last 12 months.
Even as tech and financial companies pulled back the increase in the top clients shows we are successfully reorienting the company from smaller projects to larger multifaceted relationships our.
Our international business or net new revenue increased by 9% year over year led by particularly strong growth in Asia Pacific of 17%.
Previously said expansion in international markets as a strategic priority for us and will be a key driver of growth of the future and in our ability to plan land more global relationships.
As the headwinds we believe we are hitting the bottom of a cycle government induced economic slowdowns advertising industry specific pullbacks, particularly in the tech and financial sectors, and a Hollywood writers and actors strikes, which affects our entertainment industry research, we're all sort of at the bottom of the political cycle, which is about to kick off.
Ernest with the first presidential debates.
Our adjusted EBITDA came in at $91 million or 26% sequential improvement over the first quarter, representing a 17% margin as we took proactive steps to preserve margin without sacrificing the quality of our work or the needed investment and new tech areas and products during.
During the second quarter, we realized approximately $2 8 million of annualized salary savings related to restructuring actions in the first three months of the year. We also took further steps to reduce staffing costs during the second quarter, which we expect to deliver $20 million of additional annualized staff safe. These actions have reduced our headcount by about 4% below.
Really since the beginning of the year, we will continue to be proactive with controlling staffing costs and since the end of the quarter. We've taken actions that should realize a further $15 million in annualized savings our staff costs as a percentage of net revenue came down to 64% a 280 basis points improvement sequentially in.
In addition to the actions related to staffing levels. We continue to work to streamline operations through our shared services network. Many of our central systems now online will be coming online in the next few months, helping us to realize further cost synergies across the company completion of these systems allows us to shift attention to the next 35.
And central expense reductions, we announced in the first quarter call. These steps revolve around the deployment of increased automation and AI across <unk>, but especially in our media operations.
We aim to make these operations model of efficiency over the next year.
And looking at our EBITDA for the quarter, it's important to factor in that we're now spending about $5 million per quarter in cloud investments.
We made a significant investment in marketing and our firm to the broader industry at the festival. The worlds biggest marketing event, we posted 16 of adjusted.
Earnings per share during the quarter, a 25% improvement on the first one.
<unk> remains well positioned to achieve strong EBITDA and cash flows. This year, we expect to generate $410 million to $440 million of EBITDA and convert 50% to 60% of that figure is free cash flow. This should translate into about 80 of adjusted EPS. We expect overall organic net revenue growth to be between.
<unk> zero and 2% in this non political year.
As you can see from the net new business number the growth estimates are a reflection not a client losses, but a temporary dislocations as many tech companies laid off tens of thousands of workers we.
We've seen transitory reductions in media spend among clients impacted by these tech restructurings and uncertainty around the regional banks revenue from retail clients was 29% lower because they took a more bearish stance on the economy.
Variable cost business, we have the ability typically within a quarter or two to adjust our cost base and become leaner. So that when turnarounds happen the surge of new business and lower organization cost can result in a jump of margin and the bottom line. We see this coming by the fourth quarter of this year, we are well positioned for a banner 2024 that will have a full political.
Isn't an end to the Hollywood strike surge, an AI based digital transformation and expanded large client agreements.
As I mentioned previously the second quarter, certainly second biggest ever net new business results coming in at about $75 million.
Saw significant multimillion dollar wins with Buffalo Wild wings, and anomaly Wingstop at 72 and Sunny.
A large American consumer health company at donor Virgin Mobile and Patagonia at Assembly Andren Oriental at F&B Athena health at Gale. Additionally, three months since Crispin Porter announced a new integrated creative offering the agency to see continued momentum expanding existing client relationships and adding.
Seven new client partners at.
At the <unk> Festival held in June <unk> agencies picked up 18 awards recognizing the transformational work we have done over the last 12 months.
These wins include a gold buying for Gail and the creative data category for their work at Chipotle on the highly successful doppelganger campaign.
At <unk>, we created and executed sport Beach.
Novel marketing experienced spearheaded by best <unk>, Our Chief brand and Communications Officer, We brought together 38 athletes 23 partners on 17 agencies to play sports and talk about the future of sports fandom and culture throughout the week, we have more than 5000 marketers attend the festivities and let virtually all major AD industry publications is.
The winter accounts for hosting this unique go to event raising our industry visibility we are already signing multimillion dollars deals as a result of the event and we continue to show momentum and pitch eligibility last year, we participated in about $1 billion of pitches, we've already hit that mark can expect to exceed our target of $1 two.
$1 billion of opportunities this year with about a 25% win rate in pitches, we participate in.
For the first time, we're providing additional granularity around the <unk> marketing cloud group.
Just have two divisions software platform products, principally driven by SaaS revenue and the advanced media platforms, principally driven by advertising and sponsorships, we're coming out of the gates with a net revenue in excess of $48 million.
Representing growth of 29% year over year, we expect this revenue will be lower margin, but higher gross margin and for growth to accelerate particularly next year products enter the market.
We fully expect our media studio to be a fully.
Competitive position combined with the DSP to compete for a wide range of small and large clients and programmatic media test combined with our data on behalf of clients or churn results that beat the trade desk look for continued news on this front, our Harris brand terminal, which has over 130 corporate clients.
Now is combined with Meru too.
<unk> of Harris branded research products.
Driven analysis of research tables open ended and focus groups are quickly being developed tested and deployed as products are.
Our profit product has now signed on Alpha IR.
<unk> PR and digital radical company, an impact partners in the enterprise client category and there is one another PR industry contest as the best New product out there we expect by the end of the year to be fully competitive with larger system. Some decision and serve as a full replacement we've already deployed generative AI in the product to produce.
<unk> releases briefing books and pitches as a system it will save communications professionals, a tremendous number of hours.
And prove its value we've hit over a thousand users now and have an expanding pipeline.
Our latest products smart assets essential uses AI to category its content bring it up to brand standard and pointed to where it can be most effective it is already being tested by one of Europe's largest CPG companies.
<unk> marketing cloud CTO months, or Berkshire is heading up the companywide efforts to deploy predictive degenerative AI across our agencies and combined with experts from code in theory in the new partnership reached with Oracle, we are bringing AI marketing to clients given our high ratio of engineers to designers, we are well positioned to take a leadership position in the application of.
AI to marketing and to take advantage of our recently announced AI partnership.
We expect the political cycle to pick up in the second half once the Republican debates get underway and we anticipate the 2020 for election will be the biggest in history with over $12 billion in expenditures.
In terms of M&A activities, our largest investment in this quarter was in ourselves in the first half of the year, we bought back about $40 million of stock. This is in addition to the $150 million bulk transaction that was announced on our first quarter. We also eliminated the class B shares.
<unk> from our share count and our share count today has been reduced to 268 million shares lower than the quarterly average used to calculate EPS.
We also recently acquired.
Our marketing and design studio focused on immersive customer experience and experiential engagement.
For the rest of the year, we will generally be working to shore up the balance sheet work down from here to hit the goal of net leverage near to the two times Mark as we consider some divestment of smaller non core assets as our positive cash flow is typically weighted to the end of the year.
Wherever we continue to look for key opportunities on the M&A front that will build on and expand our network to achieve the scale necessary to keep growing larger clients a global basis.
This year takes shape it should be clear that we're going to manage EBITDA and cash flow carefully and position us for the coming turnaround and the economic technology and political cycles.
At an estimated 80.
Of adjusted EPS, we remain an undervalued investment relative to both this year and the greater potential for 2024 by this and virtually any other typical metrics.
With growing large company relationships accelerating new business wins concentrated focus on costs and efficiency and the development of game changing tech products, we remain strongly positioned to benefit from the long term growth in digital marketing.
Particular in the next revolution of AI based digital transformation and marketing.
Now I'd like to hand, it over to Franklin <unk>, our Chief financial officer to work through some of our financial results in more detail Frank.
Thank you Mark good morning, everyone and thank you for joining us to discuss our second quarter results.
As a reminder, if you would like to ask a question. After the prepared remarks conclude please feel free to submit them through the chat function.
Reported revenue for Q2 was $632 million decline of 6% as compared to the same period in the prior year.
Net revenue excluding pass through costs declined 3% year over year to $539 million.
Organic terms the decline was 5% excluding advocacy organic net revenue declined 4% for the period.
Results were impacted principally in the North American market as internationally net revenue grew organically at a robust 9% led by gains in Asia Pacific and EMEA up, 17% and 8% respectively over the comparable period in the prior year.
A combination of factors led to the decline in U S revenue, including a disruption in the tech sector within the digital transformation discipline.
The actors and writers strike Wayne adversely on our media and entertainment customers within research and strategy.
And regional banking turmoil, causing uncertainty in financial services.
The decline in organic net revenues spanned across all our principal capabilities.
Felt more acutely in digital transformation, where we experienced delays.
<unk> projects as our tech clients restructured their workforces.
Importantly, we believe these circumstances are temporary with no significant impact on our strength of our clients or the inexorable shift to digital transformation and data driven media solutions.
The demand for transformative digital projects remains very strong with more than 25% of our new business in the second quarter derived from this area.
We are well positioned to resume our strong revenue growth as these temporary conditions abate.
From a larger trending standpoint.
Our stated strategy of delivering integrated services to our largest global clients is progressing as planned with our top 100 customers now representing approximately 50% of net revenue growing.
Growing 15% organically year over year.
We are also excited about our progress with the stag will marketing cloud group and were pleased to initiate disclosure about certain specifics within the capability.
In the second quarter, the stack oil marketing cloud group delivered more than $48 million of net revenue, representing a 29% increase over the prior comparable period.
$35 million of this net revenue came from our advanced media platforms group and.
And approximately $13 million was derived from software platform products.
Continued investments in the group will lead to increased margins as we achieve scale.
Moving to operating expenses and profitability.
We responded to the slowing conditions in the first half of the year and took steps to align our cost structure with the prevailing revenue streams.
Cost actions from Q1, and Q2 will generate annualized cost savings of approximately $28 million and $20 million, respectively and resulted in the company reducing personnel costs as a percentage of net revenue to 64% for the quarter an improvement of 200.
80 basis points over the first quarter.
We also continue to take steps to reduce our real estate footprint. In Q2, we took a lease impairment charge of $9 2 million in connection with the exit of a property in New York City.
This marks the early stages of our recently announced $35 million cost savings initiative.
The company also fully expects to realize the $30 million in annualized cost savings from the program that was announced shortly after our merger.
As a result, we delivered $91 million of adjusted EBIT in the quarter, representing a 17% margin and paving the way to restoring our adjusted EBITDA margin to 19% to 20% annually in.
In line with our prior expectations.
Moving to the balance sheet, we continue to take actions to improve the strength of the long term balance sheet, starting with deferred acquisition consideration, we reduced obligations by approximately $47 million from euro to $114 million at the end of Q2.
We expect to reduce that to less than $100 million.
By the end of 2023 and.
And to de Minimis levels by the end of 2024.
We also acquired three 5 million shares during the quarter at an average price of $6 27 per share for approximately $22 million.
This brings our total buyback activity for the first half to approximately 190 million reps.
Representing approximately 29 million shares at an average price of $6 45.
Capex for the quarter was $8 million.
In line with our stated target of one to one 5% of net revenue.
As a result, we ended the quarter with cash of $105 million and drawings under our revolver of 402 million.
Our leverage was 348 times largely driven by the increase in our revolver balance used to finance our share repurchases this year.
Excluding the effect of share repurchases, our net leverage would have been approximately three times in line with the second quarter of 2022.
We remain on track and committed to achieving our stated goal of bringing net leverage down to two times over the medium term.
And finally moving to guidance in light of prevailing conditions.
We are setting our full year guidance as follows.
Organic net revenue growth is now expected to be zero to 2% for the full year.
Adjusted EBITDA is expected to be between 410 and $440 million.
We expect to deliver 50% to 60% free cash flow conversion.
And adjusted earnings per share is expected to be between 76 and <unk> 85.
That concludes our prepared remarks for this morning I.
I will now turn the webcast back over to Ben Alison to open the Q&A push.
Thank you Frank and just a reminder, if you have any questions. Please do submit them via the chat button at the top of the screen.
We will start off with just a little question for Mark to go over our benchmark I talking about digital transformation.
Which dynamics proved more challenging in the second quarter, we had that with regards to our digital transformation organic revenue.
Well I think what happened with digital transformation was that a lot of the tech companies had mass layoffs and when they had mass layoffs.
Frank.
And frankly eliminated the heads of a lot of projects.
So that tended to have create a lot of disruption and so I think I think those tech companies pulled back particularly.
Particularly some of the large scale business software companies.
Pulled back or have reduced some of the projects that we're doing and also it took a number of months for there to be kind of a reorganization within the companies.
And at the same time, there was not during this period, yet a real consideration of AI projects, which are really just.
Being formulated now as people digest the importance of this new technology.
Great next question, just turning to net new business and <unk> <unk> syndrome at B Riley.
During the net new business that you're winning some big numbers.
Year end this quarter what are your latest thoughts on how the P&L progression might evolve in the second half contingent revenue growth margins EBIT being driven by the net new business.
Well I think you can look at that through the through the implied math of guidance between between.
Where we are and.
And where we're going I think as I've said.
Clearly in the script, you've seen sequential improvement on all metrics right and this quarter I would expect sequential improvement in all metrics in.
In the third quarter, and then again in the fourth quarter.
Marketing is generally weighted towards the back half of the year.
It's not unusual so that's the progression that I am expecting and as I said, you could probably do a little bit of a math yourself and figure out.
What we see is remaining there.
Good at cost and Brett Feldman of Goldman Sachs, you cite the steps you've taken to make cost adjustments and the release at which these steps are now fully implemented and benefit benefiting run rate opex in <unk>, which steps remain in progress.
We have affected all of the personnel headcount reductions as of this time.
I expect now just to start to realize the benefits of those we don't have any material further actions to take in the back half of the year.
Great turning now just over two and a question about advocacy actually.
Stag well seeing and this is from Barton Crockett Rosenblatt, what <unk> seeing in the political AD environment. We're all reading about fundraising slowdowns in the Republican primary is that going to be an issue for Stifel.
All signs so far are fairly positive about the next political season.
There were a lot of fundraising slowdowns.
Last season.
Through through this but.
What we're really seeing is that things are tracking on the advocacy side somewhat ahead of what they were in.
And I think we're all going to see what happens here in late August will there be a real primary will explode with the first primary debates I think that's the event that we've got to kind of watch and a couple of weeks, but but so far we're seeing the kind of positive signals related to how advocacy is developing and as I've said.
Said once this does get going whether it gets going towards the end of this year or the beginning of next I don't think Theres any question that will be the biggest election season in history.
Great.
Now on to generative AI.
And we talked about a lot internally from Laura Martin Needham.
You mentioned Gen. Gen AI in your press release in what ways do you think it will drive economics stack wells, primarily cost savings or to drive additional revenue upside as well.
I think over the next 12 to 18 months, we really see.
Exploration of digital transformation projects, and I think thats going to be really quite strong for our digital transformation Division I don't think people have fully realized that generative AI.
A rewriting of almost all customer interfaces it's in.
Entirely new and improved way.
Two.
Converse.
And kind of take actions on behalf of consumers to get them, what they want to see when they want to see it and I don't think we would even scratched the surface of that so I think while that's going to take a little time to snowball that thats really going to be major.
Marketing AI resources get put into it it's going to be very good for digital transformation I think thats why we initially moved with the Oracle partnership to help them and their clients begin to tackle. These problems I think obviously, it's going to help us do some streamlining of processes we're already.
Already testing now taking all of our invoices and reducing.
Processing costs of invoices from 2% or $3 down to 20 or 30 each.
But we're looking at how it works with with.
How to help produce storyboards and do a lot of internal work and thirdly, we are already deploying that as I said on our profit product.
Used generative AI to help generate refined news releases in pitches, but we're also creating I think a series of products related to the research industry, and which focus groups or are analyzed kind of on a spot open ended its our annualized on a more efficient basis, even data tables will be ramps.
The amount of them.
Really grunt work that analysts have to do to find conclusions and ferret out there is really a greatly reduced and we think that the research process will be much more efficient, we're going to sell that to the marketplace.
Just a reminder, if you have any additional questions. Please do you throw them into chat.
So a couple of investor questions.
First is Latin America important to stag will future plan, what's being done to address a stronger group position in the region.
Latin America is important I personally worked a great deal in Latin America, a few months ago I was I was down in Brazil, we have a number of transactions I think underway at various stages of completion.
Well I think.
Clearly expand our capabilities in Latin America.
Having a full network.
Within Latin America is an absolute top priority you can see in our growth rates here that we have a lot of potential growth in these international operations I believe we committed more resources now to growing in EMEA, where I think companies have been too fragmented.
I'm looking particularly.
Bringing a Latin American market.
Probably by the end of this year I think youll see significant developments on that and then Im looking at the mid East next is our second most important market for us to fill in more strongly.
Before we tend to have a couple of questions. We have here on capital allocation. A question just about the environment in general.
Based on the guidance. So what are the strangled assumptions for tech and entertainment for the remainder of the year.
I think I think our assumptions are kind of modest relative to the writers strike, we're not sure when the writers strike is going to be over we expect it to be over by next year and for it to end sometime this.
This year, but I think that our our entertainment research company is treading very carefully.
Watching expenses until this until the strike.
Over.
And I think in terms of tech.
Again, I think that we've built in modest assumptions.
Growing recovery on a on a slow basis, we've tried to be I think conservative in our outlook here.
<unk>.
The comeback will strengthen in the fourth quarter, particularly as as I think these companies see how much they really have to do to.
Integrate generative AI.
Great.
I think the last question, we're happy to just on capital allocation in general and I'm going to combine two assets that related.
Can you remind us your priority for excess cash flow for Nick between M&A buying an equity and repaying amount I'm assets standing under the revolver.
And a related question I think is what are our thoughts on buying back bonds at a significant discount.
<unk>.
No.
I think Thats a fair question I think that where we have said before that we plan to use a third for new acquisitions of third.
Our third to pay for all loans and.
A third for various stockholder moves obviously this year, we've departed somewhat from that as we have done more on the shareholder buyback side.
And I think I think as Frank said, we are taking some measures.
As I noted, possibly a small disposition as well kind of to build up our cash flow, but are we are a growth company. So it is critically important for us to take our cash grow our tech products and continue to make great investments to expand the network.
So I think that.
So I think that's going to be the priority at the same time, we've set a medium term goal of getting to about.
Two.
It's possible, we will make a decision in terms of buying discount bonds, but we haven't made any any such decisions to date.
No I think that's the last question that we have.
Thank you very much for joining us today.
We really appreciate it if you have any questions. Please don't hesitate to reach out to IR.
<unk> global Dot com to address all of those.
Thank you once again for joining us.