STGW - NASDAQ

Good morning from Stagwell's global headquarters in 1 World Trade Center, New York. Welcome to Stagwell Inc.'s earnings webcast for the third quarter of 2024. My name is Ben Allanson, and I lead the Investor Relations function here at Stagwell. With me today are Mark Penn, Stagwell's Chairman and Chief Executive Officer; and Frank Lanuto, the Chief Financial Officer. Mark will provide a business update, and Frank will share a financial review. After the prepared remarks, we will open the floor for Q&A. [Operator Instructions] 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 company's SEC filings. Please refer to our website, stagwellglobal.com/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, Mark Penn.

Thank you, Ben, and thank you to everyone joining us on our earnings call. I am pleased to report a strong quarter that reflects growth in all 5 of our principal capabilities. Underlying this growth is that the new, larger contracts we've won are only now coming online, though some even start in Q4. And we are seeing particularly strong growth in digital transformation as AI projects are coming in, the Stagwell Marketing Cloud is gaining traction as it launches its new products and platforms. In addition, we're experiencing a strong advocacy season, which will also peak in Q4. The third quarter results show us returning to industry-leading growth. We believe we are poised to deliver double-digit growth in the fourth quarter and will be well positioned for 2025. We are reaffirming our full year guidance today. After a more moderated start to the year, we are accelerating into the back half. Our new business momentum continued as we won our single largest deal to date with a global tech company and have expanded our work with major tech companies this quarter by 30%. Our tech company relationships have come back strongly. We posted a net new business figure of $101 million, bringing our LTM new business to $345 million, another company record. This was driven by a new business pipeline of increasingly larger global pitches. And I want to thank our team, led by our CMO, Ryan Linder, and his team for helping manage a great new business process. The total number of wins increased 32% year-over-year, while the average size of our wins above $1 million increased 74%. The top 25 customer with Stagwell is now approximately a $25 million a year relationship as we continue to scale the company's full service capabilities. Turning to the basic numbers. We achieved $711 million of revenue or 15% growth in the third quarter. This growth is led by 85% growth in advocacy, 25% in digital transformation and 30% growth in the Stagwell Marketing Cloud. We generated $580 million of net revenue, representing 8.5% total growth and 8% organic growth year-over-year, the best in the industry. Our adjusted EBITDA came in at $111 million in 3Q, even as we continue to invest $18 million of OpEx this quarter in growing our cloud and AI-based software solutions. Stagwell is a tech company's tech company. We are working to develop applications, reimagine consumer interfaces and deliver marketing solutions for the AI businesses of almost every FAANG company. One cannot underestimate the workflow that will be required to make AI usable by consumers and the role our Code and Theory Network will play in bringing that about for tech and nontech companies. While we have seen the digital transformation businesses of others falter, we are experiencing the opposite here and have strengthened our capabilities by bringing together all our digital transformation resources into a single network. The Code and Theory Network just won Ad Age's 2024 Business Transformation Agency of the Year award, recognizing its outstanding work to help businesses get ready for the AI era. For example, we're at the forefront of applying AI to helping voters understand politics. We designed and built the Magic Walls used on election night at both CNN and NBC. Our recent redesign of the RealClear polling site incorporates an AI bot that will answer complex questions on polling information, not just with text, but also with graphical information, which is a breakthrough in AI-to-consumer communication. You can learn more about the work we are doing with AI at www.stagwell.ai. The Stagwell Marketing Cloud group has shown strong growth in the third quarter as well, growing 30% year-over-year to $74 million. SMC grew 26% in net revenue terms to $59 million, representing 23% organic net revenue growth. Key elements of this growth are the early July addition of BERA.ai, a research tool that lets marketers and financial analysts compute the value of a brand reputation and track it in the marketplace. Marketers can war game and justify their expenditures on brand marketing with this sophisticated tool by using it to predict the enhanced value of marketing expenditures. BERA is part of a recently inked $15 million, 5-year [ARR] deal with a major payments company in 15 countries. Another SMC product, Wonder Cave, our best-in-class AI-powered text messaging platform, has been successfully leveraged by more than 500 political and advocacy organizations throughout the political season. More than 4 billion text messages have been sent during this cycle to support these organizations' fundraising, voter contact and "get out the vote" efforts. Wonder Cave is also branching out from its political origins and helping brands with their customer engagement. From February to September this year, the number of messages sent by non-advocacy brands increased by more than 500%. Around our augmented reality experience for stadiums and sports broadcast continues to gain traction as it held an unprecedented event with the LA Rams, bringing a fantasy experience to fans that was sponsored by Uber Eats and Princess Cruises. We're continuing to strengthen the global nature of our network to achieve more scaled global assignments. We acquired Consulum, a well-known government relations agency based in MENA and are actively working with them to expand our presence in the region. I am recently back from a successful trip there, and I believe we can achieve significant expansion there. We also expanded Assembly and Forsman & Bodenfors in the region and now have in total nearly 500 people there. The region's revenue grew 128% year-over-year in the third quarter and has grown 88% year-to-date. We expect this kind of growth to repeat itself next year. Other steps we have taken include the acquisition of LEADERS, an Israeli social influencer and engagement agency and platform. It expands our social content creation capabilities and upgrades our influencer marketing platform offerings. Our advocacy businesses continue to perform extremely well, with the momentum continuing past the end of the quarter to election date. Advocacy revenue grew 85% year-over-year in the third quarter. With the election outcome, we expect that public affairs and issue advocacy campaigns will surge in 2025, given legislative opportunities. And the entire sector will continue to grow as 2028 will likely be the biggest election in history given the need for primaries on both sides. Other key elements of our strategy that we're in the process of bringing for next year include a Stagwell ID Graph used to centralize all our data and information to better target consumers. We're also building what we call the Machine, a fully integrated, AI-based, content development platform built in conjunction with Adobe. We believe this will be the backbone of our technological differentiation in the new world of AI-based content. We expect this to be ready in the next 6 months. In addition to the wins now coming online, our pipeline is at record levels, up 30% over the previous year, and we are participating in multiple large pitches right now. We are also seeing more work being awarded without pitches for major clients, indicating a good environment for our work in the marketplace generally. As Frank will detail, we continue to hold the line on expenses, keeping our comp-to-revenue expense at about 61% this quarter. We continue to see our stock as undervalued given our enhanced industry position, solid growth and good cost management and have continued our buyback program, expanding it by another $125 million. Our industry-leading growth is a reflection, we believe, and the strategy we have pursued in combining the right balance of creativity and technology that will be needed in the AI era. This is reflected in our winning both new global creative assignments and cutting-edge technology deployment assignments, at the same time wisely pursue business in key development segments like advocacy that will continue to grow over time, and stadium experiences that are simply nascent. This is what makes us increasingly attractive to large brands as the challenger marketing and technology company. Now I'll hand things over to Frank Lanuto, 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 third quarter results. As a reminder, if you would like to ask a question after prepared remarks conclude, please feel free to submit them through the chat function. Stagwell delivered solid third quarter financial results with growth in all 5 of our principal capabilities. For the quarter, we reported revenue of $711 million, an increase of 15% as compared to the same period in the prior year and net revenue of $580 million, an increase of 8% over the prior period. Turning to revenue by capability. All 5 principal capabilities grew in Q3. Growth in digital transformation accelerated during the quarter, increasing to $163 million, a 25% improvement over the prior period. While advocacy grew 59%, growth ex advocacy also increased 16%, partially powered by AI-driven activities and digital transformation. Stagwell Marketing Cloud posted $74 million in revenue, an increase of 30% year-over-year, driven by significant growth in Wonder Cave as well as strength among our travel, health care and retail customers. Consumer insights and strategy reported $47 million in revenue, an increase of 7% as compared to the comparable period last year. This was partially driven by the rebound in Hollywood-based, media-focused research as well as increased project size and new business among technology, gaming, communications and automotive clients. Performance media and data delivered $80 million in revenue, an increase of 9% over the prior year period. The growth was driven by continued strength in the consumer products and business services sectors and was further supported by a recent return to growth in technology. And creativity and communications delivered $334 million in revenue, an increase of 11% over the prior period. These results were driven by growth among clients in the retail, technology and consumer sectors as well as by strength in our advocacy businesses. Moving to operating expenses. We continued to improve margins through effective cost management. Personnel staffing costs, excluding incentives, our single largest expense, declined as a percentage of net revenue by 179 basis points to 60.9% versus the prior period. We also made progress with G&A expenses. Continued real estate consolidation into centrally located regional hubs helped to reduce such costs by approximately 8% year-over-year. Our shared services initiative also contributed to annualized cost savings of approximately $10 million through reductions in accounting, IT and HR as we continue to centralize such functions. These savings were partially offset by increased direct unbillable expenses and other OpEx related to higher revenues and client servicing activities. As a result, Stagwell delivered $111 million in adjusted EBITDA in the third quarter with a related margin of 19.2% on net revenue, an improvement of approximately 15 basis points over the prior period. Excluding our cloud investment of $18 million this quarter, our third quarter adjusted EBITDA margin would have been approximately 22.2%. Moving to the balance sheet. We continue to focus on capital allocation to maintain a strong financial position. We reduced the balance of deferred acquisition consideration by approximately $72 million, down to $62 million from the end of the third quarter last year. We remain on track to reduce our DAC obligations to approximately $40 million by the end of '24, excluding recently completed acquisitions. We also reduced NCI balances by approximately $7 million from the end of the third quarter of '23, down to $23 million. These reductions to DAC and NCI will be accretive to net income and EPS in future periods. During the quarter, we acquired approximately 2 million shares at an average price of $6.60 per share for approximately $13 million. This brings our year-to-date repurchases to 13.8 million shares at an average price of $6.29 or approximately $87 million. Our buyback authorization as of quarter end had approximately $52 million in remaining availability. As noted in our press release on November 7, the Board authorized an extension and a $125 million increase in the size of our previously approved stock repurchase program. As amended, we may now buy back up to an aggregate of $375 million in Class A common stock. CapEx and capitalized software for the quarter was $5 million, broadly in line with our targets. Cash flows from operations for the 9 months year-to-date improved by $58 million relative to the same period a year ago, driven principally by improvements in our working capital management. And year-to-date, we accelerated our M&A activity relative to last year. Through the first 3 quarters of '24, we completed 7 acquisitions versus 2 last year. We acquired approximately 6x as much revenue in the current year while simultaneously deploying a comparatively smaller 4x as much cash as we continue to make accretive acquisitions that produce strong returns. We continue to evaluate our portfolio and also explore potential dispositions. As a result, we ended the quarter with $146 million in cash and drawings under our revolver of $375 million, resulting in a leverage ratio of 3.5x. And finally, we are affirming our full year 2024 guidance as follows. Organic net revenue growth is expected to be between 5% to 7%. Organic net revenue, excluding advocacy growth is expected to be 4% to 5%. Adjusted EBITDA is expected to be between $400 million to $450 million. We expect to deliver approximately 50% free cash flow conversion, and adjusted earnings per share is expected to be between $0.75 and $0.88. That concludes our prepared remarks for this morning. I will now turn the call back over to Ben to open the Q&A portion of the call.

Thanks, Frank. [Operator Instructions] Lots of questions today about digital transformation. And so we'll kick it off with a question from Steve Cahall over at Wells Fargo. DT improved nicely in the quarter. Can you help maybe to unpack some of the improvement there? And do you view this as kind of a sustainable inflection point moving forward?

Well, I do view it as a sustainable inflection point because I think, as I've been saying, AI was coming and the work that people needed to do in AI was coming. And I think what we're seeing is that it's beginning to arrive. I think it's arriving, really first, at the many tech clients who are clients of ours who have to build the interfaces to make AI accessible to consumers. And then I think that's going to spread to the clients who then have to make their own individual websites and contact points accessible through AI. So as I've said, I think there's many years of digital transformation to come here. We were in -- we went from that year of efficiency to what I said is going to be the year of competition. And I said that, look, they build the chips, they have the clouds and then they're going to get to the applications. And I think that now they're getting to the applications.

A lot of other questions about SMC, which obviously had some really nice growth in the quarter as well. A question here from Jason Kreyer at Craig-Hallum. It goes SMC has seen consistent acceleration across 2024. Can you maybe talk a little bit about what some of the key solutions resonating with clients today are? And what may be some of the levers that we might have to sort of drive greater monetization across the SMC suite over the coming years?

I think that we're seeing a pickup on some of the advanced media platforms. I think we saw some increase in kind of advertising on some of the screens. We've seen really kind of -- I highlighted what we saw in terms of the -- around our product because you can see big name sponsors are now coming on. So it's a combination of big teams, big sponsors, new experiences. I think that we're still in the nascent phase of that, that the initial sponsors are getting really positive feedback from the experiences and that, that can grow over the next couple of years into a very significant business. And we appear to be ahead of the curve in terms of other technologies that are out there that produce that kind of augmented reality experience. I think that we're particularly enthusiastic about the BERA product. It is a truly sophisticated, not just brand tracking tool, but a brand modeling and economic analysis tool that CMOs can use to answer the question that CEOs always ask: Why should I spend any money on this? And I think it is an incredible suite of tools, and we've already seen pickup across the major payments company. We've seen people really want to sign on for a long period. It's getting a really positive feedback. Over the long run, we're going to have communications products, and those have been bolstered by the -- particularly the LEADERS platform, it's an influencer platform that we're seeing also has good pickup over there. Our research products with Quest and BERA and the Brand Terminal that are already in 150 clients. And our Wonder Cave platform also is a remarkably efficient platform for delivering targeted text message marketing. We also believe that we're ahead of the curve here. We've also had the experience of developing it through the political season, which means that we have so much more experience targeting through text messaging of virtually any platform out there because of the billions of messages and the data that we've been able to build up through those messages. So I think the Stagwell Cloud is a really exciting place. I think it's one of the unique features that makes us a challenger marketing company, that the big ones really don't have this kind of incubation of tech products across these different areas and the ability to develop them and implement them as quickly as we are. And I think you're seeing promise. I hope that answers your question. I was hoping to follow up on this one.

Maybe just riffing off that a little bit, Laura Martin over at Needham, she asked some questions about the GenAI road map. And then she kind of goes -- I think this is a question a lot of investors have. Over the next 3 years, say, do you think that GenAI innovations will lower cost more or drive revenue upside? What's kind of your take?

I think for us, there's no question that will drive revenue. That because we're not just in the business of delivering marketing but in the business of delivering digital transformation, that is going to be -- there were websites, there were apps. Now there's going to be AI-based connections between companies and consumers. I think you saw Elon Musk unveil robots. There will be home bots. There will be various ways that brands now communicate to large language models with consumers in new ways. And it opens up, I think, a whole new sphere of digital transformation. So that's why for us, I expect it to be a core revenue driver. I expect that obviously, there are internal uses of AI, like better production and creating new images and storyboards and making ads with less production money. It will still take the same creativity to make it, even more advanced creativity to make it a differentiated ad. It will primarily benefit the production process, which is 90% pass-through expenses for us anyway. So cost -- so lower cost of production will only generate more interesting, creative, high-level work. It's the same thing that I saw how the survey business, as it transferred to more online work, still has incredible work for the skilled professionals involved. So I think that's the internal use. We're on it. We're deploying it in research. We're deploying it in terms of image production. I think it's going to be helpful, but it doesn't take revenue away. And I think in the long run, it does the opposite. It takes a lot of the real drudge work and a lot of the pass-through revenues away. But the real benefit for us is being in the digital transformation areas where we help the companies market AI on the marketing side and most importantly, develop AI interfaces to consumers because that's the way brands are really going to move their image.

Question from Mark

Sure. I think that about 10% to 15% of our business should be government related. I think because of the history of a lot of our firms were originally smaller firms or were not part of a larger unit, they really didn't go after government business. In the last 2 months, over at Code and Theory, they have developed a government services unit. We're developing one for all of the marketing services. We're beginning to learn all of what we need to do for the financial aspects of the complicated proposals. I want that to go from the 0 it is now to the 10% or 15% of our business that it can be. But do I see that as a 6-month process? No. Realistically, it's going to take 2 or 3 years to win a couple of major ones, but we are really well positioned to gain that kind of work. And we now have the kind of infrastructure that the government will look for to get us awarded that kind of work.

Let's change gears a little bit, talk a little bit about new business wins. And Jeff Van Sinderen over at B. Riley, he's asked, can you speak just a little bit more about some of these recent wins and a little bit about kind of revenue ramp from some of those wins as well? When would we expect to see some of those start flowing through? Is this a 2025 thing, the second half of this year? How are you thinking about it?

Sure. I think some of the tech company ones remain undisclosed. I think you've seen us announce major wins with Adobe, major wins with GM in terms of both Chevy and Cadillac. I think you've seen a pretty good win in Ferraro. I think that those -- the Adobe stuff really comes on in December and some of the GM started in the kind of second half of the third quarter. All of these things will, I think, come through full year in the next year. And I expect that these wins will all be started before the end of the year. And as I say, we have a surprising number of $10 million to $20 million pitches out that we're waiting on decisions on. That would start next year.

Good stuff. I think kind of playing off that a little bit. Cameron McVeigh has asked, when you think of a given CMO pitch, how have their priorities shifted, if at all? Like what seems to be that most important capability to win new business currently for Stagwell?

I think that number one, I think more CMOs are interested in us as the challenger. I think our visibility as an alternative coming out of Cannes with our team -- and I recently was a keynote speaker at the ANA to a couple of thousand marketers. Just in general, I think our visibility and establishment as a credible alternative to the top majors has really come up significantly. And I can see that in the pitch flow that we're getting. In terms of an individual CMO, it will vary by industry, by product. Is it a luxury industry, a car industry? Is it a more creative-interested CMO? Is it a more performance marketing one? I don't think there's any single silver bullet there. What I can say is that if you look at RFPs and how business is solicited, I think people look at marketing services, which is creative, content, research and all of those things. And we are really well skilled, and we have really incredible, creative names at the top, 72andSunny, Anomaly, Forsman, Donor, all of them are incredible, award-winning groups backed by award-winning research, now backed by award-winning social content creation with movers and shakers and leaders. And I think the second path is media. The CMOs put out quite separately media and data RFPs, and that's where Assembly and GALE are both now top names. And again, as we scale those up, we go to bigger clients across more countries. And then the third is digital transformation, and I combined all the digital transformation companies to scale that up. So what we're showing across these 3 verticals is increased scale, award-winning professionalism and a mix of creativity and digital talent that can both design and build these experiences.

Good stuff. [Operator Instructions] I think just the last one to kind of key in on a little bit here, well, maybe 2 more. But first of all, and I want to make sure we're obviously not putting out forward guidance today, and I want to make sure everyone is aware of that. But one of the questions we've got is about maybe the growth algorithm moving forward as we look into the end of 2024 and then over the course of the next few years. As you think about the growth drivers and the growth algorithm of Stagwell, what does that look like?

Well, we've always said that the most important thing for our growth is the health of digital transformation because that should be the highest growth service. And I think we went through a period here with the year of efficiency and tech pullbacks, which is over. And now I think we're getting back to that in the long term. We're seeing very nice growth in the creative services, which some people would think is a surprise. But I think as some of the majors have moved out of creative, in fact, our creative services have become more a lot more valuable. I think media is kind of a constant growth area for us that we're going to add significant data and other resources to that to be increasingly competitive in bigger pitches. And obviously, the Stagwell Marketing Cloud, over the long run, should go with digital transformation and achieve very high growth rates once I think all the products are developed. So I don't know if I fully answered, but our growth algorithm was always that the digital services will grow at faster rates, the creative services would grow at kind of lower single-digit rates and kind of research and media somewhere in between.