Stagwell’s organic net revenue has fallen for two consecutive quarters and it slashed its 2023 revenue forecast, with Chairman and CEO Mark Penn citing headwinds caused by economic uncertainty and “tech client reorganizations,” which he believes will be temporary.

The holding company also swung to a loss in the quarter. Stagwell’s second-quarter organic net revenue fell 5%, or 4% excluding its advocacy business. Second-quarter net revenue fell 3% to $539 million but increased by $17 million from the first quarter.

Stagwell now expects its organic net revenue will be flat to up 2% this year. That’s a stark drop from the 7.5% to 10% growth it predicted three months ago. It now expects to earn 76 cents to 85 cents per share on an adjusted basis this year, down from its May forecast of 90 cents to $1.05 per share.

“As to headwinds, we believe we are hitting the bottom of a cycle of government-induced economic slowdowns, advertising industry specific pullbacks, particularly in the tech and financial sectors and a Hollywood writers and actors strike, which affects our entertainment industry research,” Penn said during a conference call this morning.

Penn said that Stagwell’s digital transformation business in particular took a hit in the quarter due to tech industry struggles.

“What happened with digital transformation was that a lot of the tech companies had mass layoffs and when they had mass layoffs, they frankly eliminated the heads of a lot of projects, and so that tended to create a lot of disruption,” Penn said.

Also, as tech companies pulled back on or reduced some projects and reorganized, “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,” Penn continued.

Other holding companies including WPP, IPG, Omnicom and S4 Capital were also impacted by the economy and tech industry during the second quarter.

Shares of Stagwell were down 1% to $6.30 in afternoon trading after steeper declines earlier in the day.

New business

Still, Penn said he is optimistic that new business will continue to “accelerate” the rest of the year as he is seeing a return to a “more normal business environment.”

“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,” Penn said.

Penn also said that the holding company has begun signing multimillion-dollar deals as a result of its Stagwell Sport Beach activation in Cannes this year, including endorsement deals with athletes.

Stagwell posted $75 million in net new business in the second quarter, up from $53 million in the first quarter of 2023 and $42 million in the fourth quarter of 2022.

Staffing costs and generative AI

Stagwell is also looking to save costs through what Penn called “restructuring action” in the first quarter and a continued “reduction in staffing costs” through the first half of 2023. Notably, Stagwell cut 300 staff members in the first quarter.

Globally Stagwell’s headcount has declined by 4% since the beginning of the year and staff costs as a percentage of net revenue came down to 64% in the quarter, which was a 2.8% decrease.

Penn also predicted that generative AI will provide a “runway for future work” that will “explode” in the next 12 to 18 months.

Stagwell Marketing Cloud, which includes AR and AI products such as an AI PR company called PRophet and a stadium AR company called ARound, saw its revenue grow to $48 million in the quarter, with 35 million of that coming from its advanced media platforms, which include its airline media business, QR code platform and more.

Earlier this year Stagwell announced an AI partnership with Oracle. Currently, the holding company is using AI tools to help produce storyboards and reduce the processing costs for invoices, according to Penn.

Penn further elaborated on the headwinds in the industry, generative AI, and more in a conversation with Ad Age. 

The [organic revenue] guidance now is between 0-2% for the year. That’s a difference from 7.5% at the low end of the past quarter. Can you explain specifically when it comes to the guidance, how you went from one end of the spectrum to the other? 

It really came down to existing client cutbacks. Clients we didn't lose slowed down or postponed their work or held off on additional projects. We saw that particularly in the tech area, there was some disruption in the financial area where First Republic was a major client [the holding company lost digital transformation work with the bank]. We saw that in the retail area [revenue from retail clients was 29% lower this quarter compared to last year]. We saw that in the entertainment area with the writers’ strike and generally there was an atmosphere of economic cautiousness and it was also the bottom of our political cycle. All these factors kind of stacked up and even with those factors from first quarter, we have revenue growth, we have EBITDA growth, we are continuing to move forward and just deal with the curve balls that I think have been thrown at us and the rest of the industry. And we really think those curve balls are bottoming out now. The worst has been thrown. 

How is your creative agency and your media agency business?

Really the biggest declines were in digital transformation. Creative actually, while I think there were enough factors here that we saw it across all the capabilities, creative actually is holding up nicely winning new business. Media, we really just won six or seven new clients related to it, but during the quarter … the easiest thing for people to cancel is a media buy. And so [we] definitely lost commissions and canceled media during the quarter.

Would you say those two sides of the business saw positive growth for the quarter?

No capability had positive growth, but the strongest area of positive growth that we did see was international. Over in Asia Pacific, EMEA, those areas which are smaller but are a growing part of our business. [International business grew by 9% compared to last year, with Asia Pacific up 17%]. Just bear in mind, the previous Q2 was a 16% grower. So even with some setbacks this quarter, we're still well on our long-term targets. It still is a substantially bigger business than it was two years ago. 

Do you feel like Stagwell in particular is more affected by the writers’ strike than maybe your competitors? 

We have the largest property devoted to entertainment research and so that one property would [feel] temporary but direct effects from the writer’s strike since they test all the content … they've had writer strikes before. It will end and then people will double down on building and making content. But in the interim, it basically puts a hold on a lot of their work.

Are there specific examples that you're predicting you'll see generative AI play a big part in your business?

In terms of our digital transformation division, every company out there has to say, well, how should we interact with our consumers now on the basis of AI? We changed how we interact with websites, we changed how we interact with mobile apps now this third level of change, generative AI interactions, person-to-bot interactions on a much more human-like scale, will just provide an incredible amount of work as everyone has to catch up with everybody else to interact with consumers in new ways. So I think that the power of that is being overlooked … We outlined though that we're putting it in our tech products, particularly in the communications and the research fields where the understanding of words and numbers and what they mean can at least be pre-analyzed by AI in very effective ways, saving tremendous amounts of time. We've already developed products that [work on] focus group analysis, and open-ended analysis. We're working on tabular analysis. We're working on being able to query large databases of polling data to construct trend charts. 

There was a mention of a reduction in staff costs. I know last quarter you reported that 300 staffers were cut. How many were cut this quarter? 

We've reduced our overall workforce by 4%. We've saved approximately $48 million. We're not on a hiring freeze because we're shifting resources from some areas to areas like the cloud or internationally where we'll be hiring.