In contrast with the rosier outlook from other holding companies’ Q1 reports, Stagwell posted a revenue decline in Q1 as its clients slowed spending, leading the holding company to restructure its workforce.
On Tuesday, the holding company said it generated $622 million in revenue in Q1, a decline of 3% year-over-year. First-quarter net revenue, excluding costs, represented $522 million, a decrease of 1% versus the prior year.
Organic net revenue also declined by 3% year-over-year, driven by a slowdown in client spending and a reduced business pipeline. A “cyclical decline” in the company’s advocacy marketing business led to a 9% decline in organic net revenue in digital transformation, its most profitable business unit.
As a result of the lackluster performance, Stagwell eliminated more than 300 roles in Q1, which “will generate approximately $25 million in annualized savings,” according to CFO Frank Lenuto. It expects to eliminate more roles in Q2 to generate an additional $20 million in savings, CEO Mark Penn confirmed.
Stagwell will also continue to monitor general administrative expenses, which increased by $15 million, or 18% year-over-year. This increase was driven in part by eight acquisitions, which represented $6.2 million dollars in costs, or 41% of the overall increase. Business travel and higher travel and accommodation expenses also contributed to rising expenses, accounting for $3.3 million or 22% of costs.
According to Penn, Stagwell has been and will continue to hire in digital transformation roles. Redundancies will be evaluated based on account losses throughout the company versus making cuts to specific departments, he told Campaign US in an interview after the earnings call.
Stagwell will also continue to consider acquisition targets.
“What we're really seeing is that in digital transformation, there were a lot of pullbacks, but both the combination of new business and tech companies coming back into focus should return that to normal growth,” Penn said.
Despite the slowdown, the results are consistent with the holding company’s “budgeted expectations that the first half of 2023 would have lighter growth,” said Lanuto.
In response to investors’ concerns about the decline in digital transformation, Stagwell CEO Penn characterized it as a “blip,” which he expects will be corrected in Q2 and onward.
Meanwhile, Stagell’s performance media and research business grew 5% organically, while organic net revenue from the creativity and communication segment, which includes agencies such as Allison+Partners and Dyversity Communications, declined 3%. Consumer insights and strategy grew 1%, compared to 56% growth in the prior year. Stagwell's PR firms include Hunter, KWT Global, Sloane & Co. and SKDKnickerbocker.
Penn emphasized that when looking at business performance over the past two years, organic growth clocks in at 6%.
As Stagwell continues to navigate the economic downturn, it has restructured its business and plans to invest in capabilities that will position it for success in the future.
For instance, it combined its health companies in February under one brand, ConcentricLife, in an effort to “give them greater scale and efficiency,” Penn said in his prepared remarks on the earnings call. It also acquired Huskies in April, a digital creative marketing company in Ireland, to strengthen its European offering.
More recently, Stagwell also combined several smaller agencies under the struggling Crispin Porter Bogusky brand, led by Brad Simpson and Maggie Malek. According to Penn, CP+B has already started pitching larger clients as a result.
Stagwell has also been investing in its Stagwell Marketing Cloud group, which plays in software and advanced media platforms. Software services represent approximately $65 million of net revenue and is expected to grow more than 30% this year, Penn said. Advanced media platforms represent about $170 million in net revenue and is expected to grow 12%.
Stagwell expects to invest up to $20 million this year in cloud development as it expands the capabilities of its media products. It will make those services available to clients later this year.
Like other holding companies, Stagwell also plans to deploy AI tools across all of its agencies, which Penn said will enhance efficiency. Specifically, it will ramp up investments in its augmented reality stadium experience, ARound, which has been deployed to four major stadiums across three sports leagues. It will also invest in The Harris Grand Terminal, which is used by more than 120 clients, and PR-focused generative AI product PRophet.
Prophet recently partnered with LexisNexis to expand its journalist and content database. Stagwell agency Code + Theory also partnered with Oracle to develop generative AI apps across verticals.