Stagwell Inc.

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.

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.

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.