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spk00: Good morning, everyone. Welcome to the Stagwell Inc. webcast for the first quarter 2022. On today's webcast, Mark Penn, Chairman and Chief Executive Officer, will first provide an overview of Stagwell's first quarter, followed by a full review of the financial results from our Chief Financial Officer, Frank Lunuto. We will then take questions which you can submit through the chat function on the video webcast portal before we begin our prepared remarks i'd like to remind you that the following discussion contains forward looking statements and non gap financial data. forward looking statements about the company, including those relating to earnings guidance are subject to uncertainties reference in the cautionary statements included in our earnings release and slide presentation and are further detailed. in the company's SEC filings. Unless otherwise stated, comparisons to prior year periods and historical results discussed on this webcast will be pro forma for the combination, giving full effect to historical results as if the combination had been completed on January 1, 2020. For your reference, we've posted an investor presentation to our website at stagwellglobal.com. We also refer you to this morning's press release and slide presentation for definitions, explanations, and reconciliations of non-GAAP financial data. And now to get started, I'd like to turn it over to our chairman and chief executive officer, Mark Penn.
spk01: Good morning, and thank you for joining us to discuss Stagwell's first quarter results for 2022. While the economy contracted in the first quarter, Stagwell is growing and growing strongly. We're becoming the essential marketing transformation company that more and more clients turn to for modern marketing based on the right combination of digital transformation, performance media and data, research and insights, and creativity and communications. We're accelerating our growth pyramid as 56% of our net revenue and 64% of our adjusted EBITDA came from high growth digital services. positioning us for continued faster growth over the long term. While many legacy holding companies are guiding to 5% and 6% growth, we are reaffirming our strong double-digit growth projections for the year and expanding our long-term targets. Our growth this quarter exceeds all of the reporting industry competitors and even most of the big Silicon Valley tech companies. We recently booked our 10th contract since the announcement of the merger that exceeds $10 million in expected annual revenue. Our top 25 client relationships averaged $6 million of net revenue in the quarter versus $4.8 million in first quarter 2021, representing a 27% increase as we continue to win bigger accounts. First quarter net new business was $54 million, a record first quarter, and we had $129 million in net new business over the last two quarters. As my old boss, Satya Nadella, at Microsoft said recently, quote, we are entering a new era in which every company will become a digital company. Well, every company will also become a digital marketing company. And Stagwell will be there, riding that trend as, quote, massive opportunities, end quote, open up for our economy and the services we offer. In total, our GAAP revenue grew 32% to $643 million. Net revenue, which we believe is an important measure because it excludes pass-through expenses, grew organically 24% to $527 million, and our adjusted EBITDA surged 34% to over $100 million. excluding advocacy, our net revenue grew 23% organically year over year. In this quarter, we took in just under $100 million of net new revenue and converted over $25 million in additional adjusted EBITDA. This sets us up well for the rest of the year as our advocacy practices, which were also up, really kick in over the third and fourth quarters. Let's look at how we have been growing. Our digital transformation companies, the ones that design and engineer digital platforms and consumer experiences, grew 49% organically. Our transformation companies took on new assignments from Apple, Google, Microsoft, and Amazon as the largest tech companies turned to our agencies for transformation work. YML, which last year did pioneering work for major grocery chains and healthcare companies, won the coveted A-List Award for Consumer Experience Agency of the Year. Instrument and Code and Theory grew strongly, along with Gale, which also showed remarkable growth as it took on major assignments last year from the milk industry and this year from H&R Block. Gale is a demonstration of how our modern marketing digital approaches are taking over accounts previously serviced by legacy companies as we grow share. Consumer insights and strategy was our fastest growing capability, up 56% organically versus the prior year period. NRG had another stellar quarter, growing well above 50%, driven by across-the-board growth with streaming, gaming, technology, and film clients. We also saw strong momentum across all lines of business at the Harris Poll, where increasing brand awareness and ease of access through the Harris brand platform terminal is leading to strong engagement and expansion with its clients. Our performance media and data business grew 18% on an organic basis as the digital media trends have remained robust. Not yet reflected in the first quarter numbers are new business wins from companies like Lenovo who are turning to our media business now because of its attractive scale, digital first approach, and technology at its core. This global win brought in play our affiliate network and recent acquisition of Good Stuff, a UK media company as well. In particular, Inc., which is our travel media company, more than doubled its revenue versus the prior year as travel volumes and client investment have continued to recover as we brought online our Reach TV network into more and more airports and secured the advertising there for NFL games. Our creativity and communications businesses grew 9% organically in the quarter, driven by double-digit growth in public relations and another strong quarter, an anomaly, which benefited from a number of large contract wins in the back half of the year, including a large win from Dunkin'. Anomaly was listed as one of the top 10 agencies of the year on the Ad Age A list. Combined, our creative agencies produced seven Super Bowl spots and added work from cutting-edge companies like Q Health and Polestar. EVs, we believe, represent strong advertising and creativity opportunities in the coming years, and we've developed unique expertise in the sector. Our agencies remain at the forefront of creativity as we integrate their services with the tech stack required for effective digital marketing. We continue to focus on keeping costs down. We've largely completed the real estate consolidation in New York, having subleased over 80% of old leases and further consolidated real estate in LA. We are continuing to shrink our real estate footprint in line both with the goal of collaboration and the trends of more out-of-office work. Our strong control around costs resulted in an adjusted EBITDA margin of 19.3%, representing 160 basis points of expansion year over year. It's worth noting that this expansion comes ahead of any major cost synergies from our post-combination initiatives we expect to start to ramp up more materially in the back half of this year. Additionally, first quarter net income grew to nearly $34 million, and we generated unadjusted earnings per share of 10 cents on a fully diluted basis. As we focus on growing the business, we'll continue to equally focus on delivering growing profitability, though our extensive amortization will tend to keep our tax rate lower and free cash flow higher. As we work to break into even larger contracts, we made additional strategic investments during the quarter and a continued focus on increasing our digital offerings and expanding our global footprint. Our April acquisition of Brand New Galaxy, which was the very first member of our global affiliate network, perfectly achieves both of these aims. B&G is an e-commerce marketing and technology company based in Poland with more than 600 e-commerce and digital experts across the specialist network. This highly strategic acquisition achieves two important goals. First, it establishes a chain in e-commerce that connects directly to our media and digital transformation offerings with a focus on converting sales and growing revenue. Second, while Stagwell is full scale in the U.S., we're in the process of scaling in Europe, and B&G gives us a new level of scale in the region and access to larger assignments there. Our second acquisition outside the U.S. was Diversity Communications, a leading multicultural marketing agency in Canada, which joined the Donor Partners Network. On the expansion front, we entered the next chapter of our global expansion with the launch of Stagwell Brazil, an international hub in Sao Paulo that will anchor our investment in Latin America and connect our best-in-class services in the region. We also continue to lay the groundwork for the Stagwell Marketing Cloud, which will become the primary distribution for our proprietary SAS and DAS products developed for in-house marketers. After revealing our augmented reality product called Around at CES, we have now begun a beta testing partnership with a major league baseball team. We believe this product will revolutionize the stadium experience. Turning to our full year outlook. We are reiterating our full year guidance for 18 to 22% net revenue growth and 13 to 17% when excluding advocacy with adjusted EBITDA of $450 million to $480 million. Our EBITDA guidance currently excludes any contributions from businesses acquired in the first quarter. We continue to expect approximately 30% free cash flow growth for the full year. It is generally not our practice to revise guidance after the first quarter given it is seasonally the smallest quarter of the year. However, it's clear that our first quarter was a strong one and that we are well positioned to meet or exceed our guidance. As I mentioned last quarter, we expect to significantly exceed the long-term 7% to 9% organic revenue growth targets we discussed in our November Investor Day, and are now comfortable targeting 10% to 12% organic growth in the long term on average, in addition to $450 million of gap revenue from M&A and growth of acquisitions, and $75 million of revenue from SAS and DAS products, all targeted by 2025. We previously announced board approval of a share repurchase program effective through March 2025 under which the company can repurchase up to $125 million of Class A common stock. We are prepared opportunistically to repurchase shares during open window periods and in line with our capital allocation framework discussed last quarter. As a reminder, we broadly expect to deploy roughly one-third of free cash flow towards deferred M&A payments, roughly one-third towards new investments, and roughly one-third towards reducing leverage and buying back shares. As we increase our visibility with the investment community over time, we're confident our financial profile will eventually be reflected in share price appreciation. In the meantime, we'll continue to focus on the primary tasks at hand, helping our clients win in the digital era, making investments for future growth, and continuing to deliver against the plans we've laid out to our stakeholders. With that, I would like to share a brief video summarizing another solid quarter, after which we will turn it over to Frank Lanuto to discuss our financial results in more detail. As a reminder, we'll take questions after Frank's portion of the chat via the chat button. Let's roll the video.
spk02: Stagwell is the challenger network built to transform marketing. In 2021, we were just getting started. Take a look at our strong performance in Q1 2022. We delivered remarkable growth. Driven by high growth in three key areas. Digital transformation. Performance media. and research. We grew EBITDA 34%, expanding margins. Now we can accelerate our growth as our digital revenue is well over half our business and winning global clients and recognition. With the acquisition of brand new Galaxy in April, we're strengthening our e-commerce capabilities and continuing our global expansion. and reaffirming 2022 guidance. Q1 2022, another great step forward, and we're just getting started.
spk03: Thanks, Mark. Good morning, everyone. We're pleased to have you join us today to discuss our Q1 results. As was the case with the prior two quarters, my comments today will include a limited discussion of our GAAP results, which will be supplemented with pro forma combined results as if the business combination had occurred on January 1, 2020. The supplemental pro forma results will provide useful additional information to help you evaluate the company's performance. Revenue for Q1 was $643 million versus $181 million for the same period in the prior year, or an increase of 255%. Net revenue, excluding pass-through costs, was $527 million versus $158 million in the prior period, or an increase of 233%. And adjusted EBITDA for Q1 was $101 million versus $24 million for the same period in the prior year, or an increase of 325%. Finally, net income attributable to Stagwell Commons shareholders increased sharply to $12.7 million from $4.4 million in the prior period, resulting in diluted earnings per share of 11 cents. The remainder of my comments will now focus on the pro forma results of the combined company. Revenue for Q1 was $643 million versus $489 million in the prior year, or an increase of 32%. Net revenue, excluding pass-through costs, increased to $527 million from $429 million in the prior year, or an increase of 23%. Ex-advocacy, net revenue increased to $489 million, or an increase of 22%, as the impact of the political cycle is expected to ramp up in the second half of the year. And on an organic basis, revenue and net revenue increased by 32% and 24% for the quarter, respectively. And for the first time, revenue and net revenue increased sequentially from the cyclically strongest fourth quarter by approximately 5% and 1%, respectively. Turning to the components of the company's revenue, growth was broad-based across the reportable segments and our principal capabilities. Net revenue increased in each of our reportable segments this quarter. Net revenue in the media network increased by $39 million, or 44%, for the quarter, driven by strong growth at Gale, Inc., and Assembly. The communications segment increased net revenue by $15 million, or 31%, driven by growth at Targeted Victory and Allison and Partners. And integrated agencies, our largest segment, increased net revenue by $46 million, or 16%, driven principally by growth at Code & Theory, Anomaly, NRG, Harris, and Instrument. When viewed from the perspective of our principal capabilities, net revenue increased across all categories, led by digital transformation, which increased organically from $101 million to $151 million, or 49%, driven by growth at Code & Theory, Gale, Targeted Victory, and Instrument. Consumer insights and strategy increased organically from $33 million to $51 million, or 56%, driven by growth at NRG and Harris. Performance media increased organically from $75 million to $93 million, or 18%, driven by growth at Inc. and Assembly. And finally, creativity and communications increased organically from $219 million to $232 million, or 9%, driven by growth at Anomaly and Allison and Partners. Turning to our costs, we continue to effectively control operating expenses. As previously disclosed, we expect to achieve approximately $30 million in run rate cost synergies by the end of 2023. We've made progress with these initiatives and have taken a total of $1.2 million in charges at year-end and in Q1, principally for severance, which generated approximately $1.8 million in savings during the quarter with anticipated full-year savings of $8.8 million. We also successfully sublet certain of the properties that we exited as part of our real estate transformation project on the more favorable terms than previously estimated, resulting in a reduction of rent expense of approximately $5.5 million during the quarter. As a result, for the quarter, adjusted EBITDA increased to $101 million from $76 million, or 34% over the prior period, and the related adjusted EBITDA to net revenue margin increased to 19.3% from 17.7% in the prior period. Ex-advocacy, adjusted EBITDA increased to $90 million from $68 million, or 32% over the prior period, which, as I stated earlier, the impact of the political cycle is expected to ramp up in the second half of the year. The related adjusted EBITDA to net revenue margin increased to 18.3% from 16.9%. And finally, trailing 12-month EBITDA increased to $404 million from $378 million last quarter, or an increase of 7%. The related adjusted EBITDA to net revenue margin increased to 19.9% from 19.6%. Turning to our balance sheet, During the quarter, we acquired Diversity, a multicultural, full-service marketing agency located in Canada, for $1.2 million in cash. Our M&A-related obligations changed marginally during the quarter, increasing to approximately $306 million from $302 million, principally from performance adjustments for companies under earn-out or those with put options for their non-controlling interests. We also invested $6.5 million in net CapEx for the quarter and expect approximately $30 million for the full year, in line with our previous estimates. Inclusive of the acquisition and CapEx, we finished the quarter with $135 million in cash and approximately $140 million drawn against our $500 million revolver. Excluding those M&A obligations, our net leverage decreased to 2.7 times from 2.8 times last quarter, and our total leverage ratio at quarter end was 3.1 times. Subsequently, in April, the company acquired Brand New Galaxy, a leading provider of scaled commerce and marketplace solutions, consisting of an initial cash payment of $20 million and potential future payments of up to $50 million in a combination of cash and stock. The impact to leverage resulting from the acquisition would be an immaterial increase in the company's total leverage of approximately 0.05 times. And finally, turning to our guidance, as Mark previously noted, we are reiterating our full year guidance of 18 to 22% organic net revenue growth and 13 to 17% growth ex-advocacy, with adjusted EBITDA of $450 to $480 million, excluding the impact of acquisitions. That concludes our prepared remarks for this morning. Thank you. We will now open it up for Q&A. Please submit your questions via the chat button at the top of your screen.
spk00: And we have some questions in the queue, so I'll kick it off. The first question comes from Michael Nathanson at Moffitt Nathanson. Can you guys talk about why you're seeing such weakness in the advertising platforms and e-commerce companies at the same time traditional media and agencies are actually doing quite well? What's the disconnect?
spk01: Can you repeat that?
spk00: Your weakness is being seen in the advertising platforms and e-commerce companies. At the same time, the traditional media and agencies are doing quite well. What's the disconnect?
spk01: I don't really see weakness. you know, as he describes it. I think what we're seeing is when you look at our capabilities, there are four elements of the pyramid. And you see all of those principal digital capabilities with incredible growth rates. And then you see, actually, even among the advertising, plus 9% organic growth, a very respectable, you know, certainly above the traditional holding company's growth, even with our traditional services. So I really see growth across the board. But of course, our growth model is that the top three capabilities grow faster and faster and are a much larger part of the pyramid because more and more marketing is digitally related. And what we're finding, though, is our media division, which previously couldn't access customers with really large scale accounts now after the after the merger the unification of that creates a division with over five billion dollars of media acquisition with outlets all over the world the ability to place larger and larger contracts and that's what we're seeing now winning one and two hundred million dollar media placements instead of fifty to seventy million dollar placements so a lot of this has to do with how the merger produced a radically different company that can gain share within the marketplace.
spk00: I think a quick follow-up to add to that, what's the disconnect between Stagwell growing so quickly, but the large tech companies who've reported not growing as quickly as we are?
spk01: Well, I think that's explained by the fact that we're able to grow share in this marketplace. I think that when you look at us, we are the new kid on the block with digital capabilities in line with what people are looking for. And so many of the contracts we've won One were A, from legacy companies, and B, were different in character than the old contracts used to be. The old contracts used to have primarily legacy services. The new contracts have people who want to have the right ad to the right person at the right time. They want to combine digital targeting along with the kind of creativity that we can offer. And that's what's enabling us to grow this quickly.
spk00: The second question comes from Tim Nolan at Macquarie. How can you explain the strong ad spending figures and positive outlook versus all the questionable macroeconomic issues? Is inflation an overriding positive driver for your clients to boost ad investments?
spk01: It doesn't look like inflation is a positive or negative. It may nominally increase advertising buy or the size of contracts. So the headwinds, though, if you look at the headwinds in the economy, underneath the overall decrease in GDP, you saw actually a pretty strong consumer economy. And so that strong consumer economy really fuels the kind of work that we do at Stagwell Inc. We have not seen clients holding back, cutting media buys. We see them kind of launching straight away with their plans and programs or even expanding them. One client expanded their program. one of our largest clients by nearly 50 percent just in the last week or two. So we're not seeing people pulling back from the consumer economy.
spk00: The next question comes from Stephen Cahal at Wells Fargo. Despite your strong organic growth out of the gate this year, the reiterated guidance implies slowing growth through the remainder of the year. How much of that is attributable to tougher comps, and what's your outlook for the ad market and digital transformation in 2020? the second quarter and onward, consumers seem to be going back to brick and mortar and in-person experiences. Have you started to see any impact from what looks like a slowing e-commerce growth?
spk01: Again, we're not really seeing within our network a slowing of e-commerce growth. While I understand there was such a shift really to e-commerce during the pandemic, what's happening post-pandemic is, yes, sales are normalizing. But I think, as Satya said, every company is becoming a digital company. So those companies that didn't have digital channels recognize that they have to have digital channels, even if their sales and marketing are going to be split. And that's why we see continued growth in our digital transformation, because people have years and years of digital transformation to catch up with, to have a balanced ecosystem between brick and mortar and what they can sell online, even if there's a Even if they've hit the brakes on the car, right after they hit the brakes and stop at the red light, they are going right forward into that. And that's why I think you see our business growth unabated in those areas.
spk00: We'll take an investor question that was submitted. Great quarter. Thank you. Can you please comment on the outflows behind the working capital in the quarter? I think this one's for Frank.
spk03: Sure. I think overall it's mostly timing. As we've pointed out, our media business has grown quite rapidly. And part of that is managing working capital. And we had several prepayments of size in Q4, and then Q1 was a payments period where the media ran, a lot of media ran, and we had outflows. So you see some of that taking place on the liability side of the balance sheet. The use on the receivable side is really just from the strong growth and the billings from that point. And then to a lesser extent, Q1 is also the quarter where you make a lot of your payments, right? Bonus payments all get funded in Q1. Taxes reset in Q1. So you have the normal cycle. But I would say overall, it's a timing matter. And that's it.
spk00: Great. The next question comes from Cutgun Miral at RDC. Great to see assemblies win with the Lenovo account. It seems validating to some of your investments and how you've repositioned the business. Can you talk about if there are any broader implications to how you approach the business going forward?
spk01: I think the biggest implication is that our media division now can go out and do contracts that are global in nature and that encompass hundreds of millions of dollars of media buys. And that opens up a whole new world. And I think, as a lot of people observed, and if you go through the trades, a lot of media is out for bid these days. A little less creative is out for bid, and a little bit more media is out for bid because a lot of people are saying, well, I used to do mostly conventional media. Now I've shifted my media. I've really got to reconsider the team. We are already 75% online placement, and that positions us extremely well for clients that are looking to shift their media placement as we see out there.
spk00: Great. A follow-up from Kudgun. Has the recent market dislocation changed the opportunities you see ahead with the M&A?
spk01: I hope maybe it will bring down prices. I think that the market volatility probably will play to our advantage in terms of making, I think, we're value, we are very much kind of value acquirers. And we're going to acquire services in geographic locations at reasonable prices with really strong growth profiles. And that's our goal. And I think the volatility helps us achieve our goal. You know, there are other things that others were willing to pay for at much higher rates, but then be faced with potential problems. Part of our careful financial management here is having the right balance between what we pay and what the future that those companies can really have to grow when they come into our network. And we think that if anything, this volatility helps us achieve just the right balance.
spk00: And a question from Avi Steiner at JP Morgan. Is Stagwell seeing any slowdown from its clients?
spk01: As I said before, and before this call, I kind of re-canvassed to just see if there was anything. We don't see any slowdown. We live through the pandemic. We know what it's like when clients call up and say, stop the media. curtail things. The underlying consumer economy remains strong. That's why the Fed is taking the actions that it is. We have a very strong consumer economy. And marketers going into this year, there's a big travel season coming up. Everyone knows it. It's going to be a record travel season. And so all the companies are increasing kind of marketing in that sector. Car companies have had supply problems. I think that's already been incorporated. into into kinda what we're saying but they don't have demand problems and at the same time they're rolling out new EVs which generates a whole new kind of marketing across so many different companies and so and so many different models and then I think we're gonna go into the into the fall season, where I pointed out quite recently an article about how to market during inflation. And, of course, it's not that you stop marketing during inflation. It's that you may have different kinds of marketing that take into account what consumers are facing. And so that's going to be a whole other kind of marketing that's going to be triggered here to get the consumer sentiment and feelings just right in an inflationary economy.
spk00: Great. And the last question is from an investor. Leverage will be below three times exiting this year. What is your target leverage? And at what point can you get aggressive on buybacks if you feel your stock continues to be undervalued?
spk01: Our target, and I should have reiterated it, is about 2.5. And we are capable, I think, in the model of achieving something lower than that. But I've set out a target now. Originally, it was 3. I've moved that to 2.5. And I'll say no more than the fact that we have in place now a program in which we can do buybacks of the stock during open window periods.
spk00: Great. And that concludes our call. Thank you, everyone. And have a good weekend.
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