Stagwell Inc.

Good morning from Stagwell's global headquarters in One World Trade Center, New York. Welcome to Stagwell Inc's earnings webcast for the third quarter of 2024. My name is Ben Allenson, 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 Lanuta, 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. You're welcome to submit questions through the chat function. 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, stagworldglobal.com forward slash investors for an investor presentation and additional resources. This morning's press release and slide deck provide definitions, explanations, and reconciliations of non-bank financial data. And with that, I'd like to turn the call over to our chairman and CEO, Mark Beck.

Thank you, Ben, and thank you to everyone joining us on our earnings call. I am pleased to report a strong quarter Underlying this growth is that the new, larger contracts we want 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 StatWheel 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 relationships have come back strong. 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, increasingly larger global pitches. 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 a million dollars increased 74%. A top 25 customer in Stackwell 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 cyber 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 FANG 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 not tech 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 Ed 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.stackwell.com. growing 30% year-over-year to $74 million. SMC grew 26% net revenue terms to $59 million, representing 23% organic net revenue growth. Key elements of this growth are the early July edition of Bara.ai, a research tool that lets marketers and financial analysts compute the value of brand reputation and track it in the marketplace. Marketers can war game and justify their expenditures on brand marketing tool by using it to predict the enhanced value of marketing expenditures. Barrett is part of a recently inked $15 million five-year ARR deal with a major payments company in 15 countries. Another SMC product, WonderCave, our best-in-class AI-powered text messaging platform, 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. WarnerCave 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 broadcasts 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 Consul, 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 in the area. We also expanded assembly, enforcement, and boat enforcement in the region, and now have in total nearly 500 people there. The region's revenue grew 128% year-over-year on 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 day. Advocacy revenue grew 85% year over year on 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 writing for next year include a stable 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 six months. In addition to the wins now coming online, Our pipeline is at record levels of 30% over the previous year, and we're participating in multiple large pitches right now. We are also seeing more work being awarded without pitches from 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 buy-buy program, expanding it by another 125 million times. Our industry-leading growth is a reflection, we believe, in 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, we've wisely pursued 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 attracted to large brands as the challenger marketing and technology company. Now I'll hand it over to 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 the prepared remarks conclude, please feel free to submit them through the chat function. Stagwell delivered solid third quarter financial results with growth in all five 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 year. Turning to revenue by capability, all five 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 WonderCave, as well as strength among our travel, healthcare, 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 continue 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, Stagg will deliver $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 2024, excluding recently completed acquisitions. We also reduced NCI balances by approximately $7 million from the end of the third quarter of 2023 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 a quarter rent had approximately $52 million in remaining availability. As noted in our press release on November 7th, 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 nine 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 three quarters of 24, we completed seven acquisitions versus two last year. We acquired approximately six times as much revenue in the current year, while simultaneously deploying a comparatively smaller four times 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 3.5 times. 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 75 cents and 88 cents. 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.