Stagwell Inc.

Good morning from Stagwell's global headquarters in New York City. Welcome to Stagwell Inc's first quarter 2025 earnings webcast. My name is Ben Allenton, and I lead the investor relations function here at Stagwell. With me today are Mark Penn, Stagwell's founder, chairman, and chief executive officer, and Frank Lenuto, 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, stagwellglobal.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-GAAP financial data. And with that, I'd like to turn the call over to our Chairman and CEO, Mark Beck.

Thank you, Ben, on this really lovely day here at the World Trade Center. And thank you to everyone joining us for our earnings call. Stagwell delivered strong results to start the year firmly in line with our expectations and with another record-breaking net new business quarter indicative of the strengthening position of Stagwell as the challenger network. While others in the industry are flailing about with endless reorganizations, behemoth mergers, and downsizing, Stagwell is on a steady course of growth, scale, and innovation. I have never been more bullish about the opportunities for Stagwell in this marketplace. Despite the noise of tariffs and the low point of the advocacy cycle this quarter, we achieved double digit net revenue growth X advocacy of 15% in digital transformation, 10% in creativity, 45% in the Stagwell marketing cloud. We're taking share. We have built an enviable mix of best in class creative, transformative digital capabilities, and an innovative suite of tech solutions. I would strongly encourage you to visit Stagwell's investor website to watch the webcast of the investor day we held last month to learn more about our strategy to grow, scale, and innovate. Turning to our results, Stagwell delivered strong growth in four of five principal capabilities, posting 9% total net revenue growth, excluding advocacy in the first quarter. We have achieved this while generating $81 million in adjusted EBITDA and investing $17 million into our tech initiatives and carefully managing our labor costs. The Compton net revenue ratio for the first quarter was 65.3%, an improvement of 175 basis points over the same period in 2023, the last nonpolitical year. Work has begun on implementing the AI tools that underpin the $80 to $100 million efficiency drive that we announced on Investor Day. We are on track to achieve $60 to $70 million in cost savings this year, and we'll update further on that progress in the second quarter call. SkyGrowth saw minimal impact from tariffs in the first quarter. We'll continue to monitor developments as the second quarter begins, but our business, which is particularly strong with tech companies, is not directly impacted. and customers have not signaled any intention to pull back spending. Tariff mania seems overblown for us at the moment. However, reputation risk is at the top of mind of many executives as they navigate the challenges that tariffs and thorny political issues bring. Our risk and reputation unit, bringing together experts from across Stagwell's agency, is uniquely positioned to help brands adopt their message in a rapidly evolving landscape and is winning major new assignments. The first quarter saw record net new business trends, a record in Stagwell's history. Stagwell posted $130 million in net new business for the quarter, almost double a year ago. This figure includes key wins with PayPal, Panera, Carmack, Celsius, and Hyatt. These results bring our trailing 12-month net new business to $446 million, more than $160 million higher than the same figure at the end of 1Q24. These wins are highlighted by customers in the technology and retail industries, leading to strong growth in these verticals. In the first quarter, we saw technology customers increase their spend with us by 18% and retail customers by 52%. The work for these new customers is just beginning and will ramp throughout the year, particularly in the second half, giving us confidence in our guidance. We're already transforming brand positioning of many clients. Our agencies reintroduce Starbucks to the world at the Super Bowl and launch Visa's new global campaign at the Oscars. We're winning bigger assignments with bigger clients that offer great opportunities to expand the relationship across our core capabilities. We now report organic growth annually as opposed to quarterly, but you can rest assured that this quarter saw a positive organic growth advocacy headlined by the digital transformation capability that had 15% growth but no acquisitions or dispositions. Turning to scale, we have now fully reinvested the proceeds from the concentric life disposition into prudent M&A at accretive multiples. M&A will continue to be a key driver for us as we look to expand internationally and strengthen our capabilities while deploying capital wisely. We announced this week the acquisition of JetFuel to strengthen our experiential and shopper marketing capabilities. They've delivered outstanding experiences for a number of established brands like Walmart and Unilever, as well as amplifying the reach of emerging brands like C4 Energy and Mr. Beastables. Our recent acquisition of German Media Monitoring and analytics platform, Unicefta, is also off to a good start. It recently won significant multi-year business with the European Commission and the BBC. In the Middle East, we completed the acquisition of the Create Group at the beginning of the second quarter, but the collaborative work with the Code and Theory Network started before the deal even closed. The partnership has already delivered transformative work for clients in screening work for HSBC and Condé Nast in Abu Dhabi. The Middle East is a major growth market for us, and we saw net revenue grow by more than 250% year over year in the first quarter. We're also making progress in Asia, winning new mandates with Diageo, Jollibee, and Princess Cruises. This push will only be strengthened by the addition of ADK Global, which we anticipate will close in the next couple of months. And we continue to lean into the sports business as a key differentiator. We added to our sports offering with the acquisition of Gold Rabbit in Q1, and and the around augmented reality experience continues to gain traction, now providing its innovative experience to the athletics at their new home in Sacramento. This sports push aligns with our programming accounts, where we will once again bring together athletes, marketers, and global leaders. This time as the official sports partner of the Lions Festival. We have inspirational athletes like Carmelo Anthony, Alex Rodriguez, Sue Bird, and Jordan Childs in our lineup. Look for more partner and programming announcements in the coming weeks. Lastly, we continue to be at the frontier of innovation as a tech company's tech company. The Stagwell Marketing Cloud saw net revenue growth, excluding advocacy of 45% in the first quarter. We celebrated a number of wins, including with a large U.S. specialty insurance company. Quest brands saw a particularly strong growth approaching 200% in the quarter as it incorporated recent acquisition Barrett.ai. Brands like Intel, Amazon, HP, Lenovo, and PayPal are increasingly trusting the Stagwell Marketing Cloud to provide tools to augment their marketing capabilities. SMC will continue to be an investment priority for Stagwell in 2025. We invested approximately $17 million in the quarter to further strengthen our data, software, development, and sales efforts. However, we anticipate the investment cadence to decline throughout 2026 as the products reach greater maturity and gain additional traction. AI continues to be front and center at Stagwell as we announce the appointment of John Cahan, a former Microsoft and IBM executive, as our Chief AI Officer at Investor Day. We continue to make progress with our internal tools like the Stagwell ID Graph, a proprietary customer ID platform already delivering outstanding impact for a global CPG client and a DTC retailer. We also announced on Investor Day that we're working with Palantir to test developing advanced military-grade targeting to enhance the utilization of Stagwell's unique datasets. And we anticipate the machine content management operating system we're developing with Adobe will begin integrating into workflows at Stagwell at the end of the summer. The completion of these two products will mark a major advance in the capabilities of our media and data business and its ability to compete with the other majors. Our digital transformation capability, led by Code & Theory, grew net revenue 15% year-over-year in the first quarter, excluding episodes. Code & Theory debuted its new Adobe Content Supply Chain solution at the Adobe Summit, driving personalization at scale with generative AI. We saw tremendous interest in Code & Theory's capabilities at the event, drawing almost 700 demos and leads. Meanwhile, Leftfield Labs developed an interactive AI demo for the Qualcomm CEO's keynote speech, at South by Southwest, showing how agentic AI can be integrated into everyday life with an on-device processing like AR glasses or wearables. Our transformative work has not gone unnoticed in the industry. Just two weeks ago at the Webby Awards, Code & Theory, Kettle, and Lethfield Labs received a total of four accolades for their work with NBC's election coverage, Elf Beauty, and Hasbro. These successes come on the back of Coded Theory being named Digital Innovation Agency of the Year by campaign. And the recognition is not just within our digital transformation capabilities. Four of our agencies were honored at the 2025 Ad Age Award last month. Anomaly in 72 landed on the prestigious A-list with Code named B2B Agency of the Year and Gale named Business Transformation Agency of the Year. Stagwell's first quarter results are firmly in line with our expectations. Our new business trends give us a positive tailwind for the remainder of 2025, and we are reiterating our guidance today. The momentum in the Stagwell business is undeniable. We're providing the best services and tools at the intersection of creativity and technology. Our customers trust us to help transform the way they interact with their customers. Our capacity to deliver strong growth, expanding margins, and an MA engine needs to be appreciated by the street. I firmly believe that Stagwell has never been stronger, and I'm optimistic about Stagwell's trajectory and ability to reach $5 billion in revenue over the next five years. Now I'd like to hand it over to Frank Lenuto, our Chief Financial Officer, to walk through some of our financial results in more detail. Frank? Thank you, Mark.

Good morning, everyone, and thank you for joining us to discuss our first 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 first quarter financial results, which were in line with our expectations. For the quarter, we reported net revenue of $564 million, an increase of 6% over the prior period. Excluding advocacy, which is outside the political cycle, total net revenue grew 9%. In the first quarter, digital transformation net revenue grew 8% to $106 million. Excluding advocacy, net revenue grew 15%. The continued resurgence in digital transformation was fueled by a 16% increase in revenue from technology clients, driven by expansions at Apple and Google, and a 28% increase in revenue from industrial clients. Stagwell Marketing Cloud posted $63 million in net revenue in the quarter, an increase of 32% year over year. Excluding advocacy, net revenue grew 45%. Performance was driven by the recent acquisitions of Bera.ai, Leaders, and Unicef, as well as the strong performance at our Harris Quest brand, which grew more than 170% with existing clients due to recent significant platform enhancements. Creativity and communications delivered $242 million in net revenue in a quarter, an increase of 7% over the prior period. Excluding advocacy, net revenue grew 10%. The results were driven by strong performance with retail clients, which more than doubled year over year, and by a 15% increase with technology clients, as we began to realize the impact from our record net new business wins. Consumer insights and strategy returned to growth in the first quarter, posting $49 million in net revenue, an increase of 8% as compared to last year. The growth was led by a 23% year-over-year increase in revenue from technology clients and an almost doubling year-over-year revenue from financial sector clients, fueled by new business from Visa and JP Morgan. Finally, performance media and data reported $104 million in net revenue in the first quarter, a decline of 10% over the prior period. Growth in consumer products and retail clients was offset by a reduction in spend by a single customer in its strongest seasonal quarter as it currently revises its media strategy. We fully expect to see a strong sequential rebound in performance media and data's results starting in Q2. Moving to operating expenses, we continue to make progress against our goal of margin improvement through effective cost management. Personnel costs, excluding incentives, are our single largest expense, landed at 65% in the first quarter. Excluding advocacy, the ratio was 64.8%, 50 basis points lower than last year and 150 basis points lower than in 2023. We've also made further progress with our targeted cost-saving initiatives. In the first quarter, we actioned approximately $4 million in annualized cost savings in connection with our real estate consolidation and shared services initiatives. Our content supply chain initiative, which we introduced yesterday, is just getting underway. We expect to take actions throughout 2025, totaling $60 to $70 million in annualized cost savings, with the remaining $20 to $30 million being taken in 2026. We expect to start providing updates on our progress with this initiative as early as the second quarter earnings fall. Summarizing our operating results, we delivered $81 million in adjusted EBITDA in the first quarter with a margin of 14.3% on net revenue, an improvement of approximately 50 basis points over the same period in 23, the last non-political year. Excluding our cloud investment of $17 million this quarter, our first quarter adjusted EBITDA margin would have been approximately 17.3%. Now, moving to the balance sheet, we continue to focus on capital allocation to maintain a strong financial position. Our deferred acquisition consideration balance stands at $93 million at the end of the first quarter, $8 million lower than at the end of the same period last year, and approximately $73 million lower than at the end of the first quarter in 2023. We've also reduced our NCI balances by approximately $2 million year over year, to $21 million. During the quarter, we acquired approximately 1 million of our shares at an average price of $6.07 per share for approximately $6 million. Our buyback authorization as of the end of the first quarter had $164 million in remaining availability. CapEx and capitalized software for the quarter was $16 million, which was broadly in line with our targets. As a result, we ended the quarter with $138 million in cash and drawings under our revolver of $375 million, resulting in a net leverage ratio of 3.3 times. Since the end of the first quarter, we have taken two significant steps to simplify our capital structure and increase our financial flexibility. Early in the second quarter, we completed the refinancing of our revolving credit facility on improved terms. The revolver now has a capacity of $750 million, an increase of $110 million, reduced credit spreads, and an extended maturity date of April 2030. This is an important step for Stagwell, giving us increased financial flexibility as we pursue our growth strategy. And on April 2nd, as announced at our investor day, Stagwell converted all outstanding Class C shares to Class A common stock. Not only will this simplify our capital structure, but it will also lead to a step up in our tax basis, resulting in future tax savings. And finally, as Mark noted, we are reiterating full year 2025 guidance as follows. Total net revenue growth is expected to be approximately 8%. Adjusted EBITDA is expected to be between $410 to $460 million. We expect to deliver in excess of 45% 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. Ben?