Stagwell latest holding company to be hit by tech pullback

Stagwell is the latest advertising holding company to have its Q2 results negatively impacted by a decline in marketing spending from Big Tech companies in North America. 

On Tuesday, Stagwell reported an organic revenue decline of 5% year over year to $632 million, as U.S. tech giants made mass layoffs, slashed marketing spend and delayed projects. It is the latest holding company to be impacted by the tech pullback, along with IPG and WPP. 

Revenue from retail clients was also down 29% YOY as the sector took “a more bearish stance on the economy,” Stagwell CEO Mark Penn told investors on an earnings call Tuesday.

The results, though against tough comparables of 16% YOY growth in Q2 2022, prompted Stagwell to lower its full year outlook to flat to 2% organic net revenue growth, down from an initial projection of 7.5% to 10% growth made at the end of 2022. 

Poor performance also led Stagwell to take further cost-cutting measures in the quarter, eliminating a total of 4% of its global headcount. The layoffs began in Q1, as Stagwell cut 300 staffers. In total, layoffs are expected to drive nearly $50 million in annualized savings on salary costs. 

According to Penn, Stagwell has already made further staff cuts at the end of Q2 that will result in an additional $15 million in annualized savings, but after that, “any trimming of labor [has been] concluded.” 

Despite the tough quarter, Penn said he believes the U.S. is “hitting the bottom of a cycle of government induced economic slowdowns, advertising industry-specific pullbacks, particularly in the tech and financial sectors, and the Hollywood writers and actors strike, which affects our entertainment industry research.” 

He added that Stagwell is deploying more automation across the business, particularly on the media side, with a goal of realizing an additional $35 million in cost savings.

“The growth estimates are a reflection not of client losses, but temporary dislocations as many tech companies laid off tens of thousands of workers,” Penn said. “We've seen transitory reductions in media spend from clients impacted by these tech restructurings and uncertainty around the regional banks.” 

Tech clients retreat

Slashes in spending from tech clients was most acutely felt in the U.S, which accounts for 80% of Stagwell’s business and declined 8% YOY. This dragged down global revenue, despite 9% YOY international growth. Asia Pacific grew organically 17% YOY, while EMEA grew 8% over the same period. The U.K. grew 8.6% YOY.

Tech companies make up roughly 18% of Stagwell’s business, which Penn sees as a long-term advantage because “tech is the driver of our economy.”

“We are seeing a return to more business as usual,” he added. “We think this was the bottom of it.”

According to CFO Frank Lanuto, the decline in organic net revenue “spanned across all of our principal capabilities,” but the tech downturn most acutely impacted Stagwell’s digital transformation discipline, which accounted for 36% of organic net revenue growth in the quarter and declined by 13% YOY. This marks a further decline from Q1, when revenue from digital transformation, typically one of Stagwell’s strongest growing disciplines, decreased 9% YOY.

Penn said most of the staffing cuts were concentrated in the digital transformation division.

“We do a lot of tech work for tech companies, and we lost a lot of people who were managing projects in the mass layoffs,” he said. “Importantly, we believe these circumstances are temporary,” he added, noting that roughly 25% of Stagwell’s new business wins are focused on digital transformation projects. 

On the bright side

Stagwell had its best quarter for new business yet at $75 million, with a handful of multi-million dollar wins including Buffalo Wild Wings at Anomaly, Wingstop at 72andSunny and Patagonia and Virgin Mobile at Assembly. Crispin Porter + Bogusky, which is in the midst of a turnaround with new leadership, also won seven new clients. 

New business revenue grew from $53 million in Q1 2023 and $42 million in Q4 2022, bringing the total for the past year to more than $250 million, according to Penn. He mentioned Stagwell is averaging a 25% pitch win rate.

Stagwell’s top 25 clients grew 12% YOY, with three clients surpassing $50 million in net revenue in the last year. 

“Even as tech and financial companies pull back, the increase in [our] top clients shows we are successfully reorienting the company from smaller projects to larger multifaceted relationships,” Penn said. 

International growth was also strong, with Penn calling expansion abroad a “strategic priority” and a “key driver of growth for the future and our ability to land more global relationships.” The Stagwell Affiliate program, launched in 2021, has grown to more than 70 companies and has served as a “feeding ground” for several acquisitions, he added.

“We’re really planning to rev up the program next year with our first large-scale meeting of all of the affiliates and put it to even harder work,” he said. “It’s played pivotal roles in the multinational and multi-continent contracts that we’ve gotten.”

Over time, Penn wants Stagwell’s regional revenue mix to shift to about 60% U.S. and 40% international markets. 

Another growth area is the Stagwell Marketing Cloud division, which the company broke out as a separate division in its earnings call for the first time. It is classified by software products, driven by SaaS revenue from products such as PR automation tool PRophet, and advanced media platforms. The division grew 28% YOY to $48 million. 

Penn aims for the Stagwell Marketing Cloud division to hit roughly $500 million over the next four to five years as it invests in new revenue streams such as SaaS products and generative AI.

Penn is also optimistic about the 2024 election’s impact on Stagwell, which he predicts will be “the biggest election in history” with roughly $12 billion in spending. Political advertising accounts for roughly 12% of Stagwell’s revenue, which he projects could grow to 15% during an election year. 

“There’s a lot of growth and a lot of capabilities to expand internationally, and also [an opportunity] to take a lot of the skills of politics to corporate and commercial battles,” he said.