Stagwell Inc.

Good morning from Stagwell's offices in Washington, D.C. Welcome to Stagwell Link's second quarter 2025 earnings webcast. 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, Ryan Green, the chief financial officer, and Franklin Newton, EVP of finance. Mark will provide a business update before Ryan and Frank 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-GAAP financial data. And with that, I'd like to turn the call over to our chairman and CEO, Mark Bennett.

Thank you, Ben. And thank you for everyone joining us for our earnings call this morning. I'm pleased to report another set of strong results for the quarter, fully in line with our expectations. As we look forward, we expect to achieve our full year guidance on all metrics as growth accelerates, margins expand, leverage declines, and cash flows continue to strengthen. Our net revenue grew an industry-leading 8%, and ex-advocacy grew by 10%. On top of this growth, we achieved a swing of $122 million of operating cash flow improvement continued to expand our top client relationships, and scooped up significant new business. We expect growth to accelerate in the second half of the year as the economic outlook is positive, large new clients are coming online, and client churn typically drops off after the first half of the year. While digital transformation of other companies is lagging, ours is booming. While most of the others are struggling with new business, our pipeline is robust and growing. While others are cutting thousands of workers, we are picking up key talent from both coasts, including 10 major new executives for our media businesses with vast big client experience. Today, I'm pleased to announce the hiring of Slavi Samarja, who is joining us this fall from Omnicom's Analect to work on our forward-looking data strategy. He joins a team of executives hired from companies including IBM, Accenture, and Microsoft. We'll have more news on this soon. This is an incredible time of opportunity for Stagwell. In an industry of behemoths having trouble with their scale, we are just the right size to adopt to the coming revolution of AI. We're investing about $20 million a quarter of OPEX in adopting to new technologies and building state-of-the-art offerings. Discipline by discipline, we're adopting AI, applying it to tasks that can be streamlined or reimagined. In media, we're developing agents that deploy targeted media and will streamline our operation and costs. In communications, we have bots that assemble influencer campaigns, write press releases, and pitch stories. In research, we're already deploying dashboards that read and analyze survey data for our clients on the basis of simple prompts and questions. In our creative companies, we're using AI to dream up and produce unique standout ads with incredible new special effects. We are building and deploying in partnership with Adobe, the Stagwell content supply chain, management system, and wrapping up all our tools and software into the machine, a central nervous system designed to connect data, people, teams, and software tools across the Stagwell network. The machine addresses a clear client need, a single unified platform for accessing all our services. We're all ready to begin to roll out these systems and expect them to fully deploy by early 2026. It will dramatically increase efficiency, adopt new ways of working, and likely reduce costs by about 15%. Nothing shows that our tech-first approach is resonating more than growth among our top 25 customers. Our top 25 in the second quarter generated over $175 million in net revenue. That same cohort a year ago generated $140 million, an increase of 26% year-on-year. Our top 25 customers now average approximately $28 million in annual net revenue. Our top 100 clients grew similarly in size. Historically, from 1980 to 2005, a company like ours would be judged solely by its total growth. with organic growth relevant only in the later stages of scale and maturity, when such scale accelerates organic opportunities. Because of high quarterly variations, I suggested that analysts should look at our mix of organic growth annually, and we adopted total growth as our primary guidance metric. I still believe that, but in the interest of transparency, We will continue to report all metrics each quarter. While we achieved an overall 10% X accuracy growth this quarter, 20% of it or 2% was from purely organic growth. But as we saw last year, we have a cycle of lower organic growth in age one, as that's when clients churn, and higher organic growth in age two, when media and other clients tend to increase their spend. With new assignments from GM, Visa, Adobe, and Target, we expect a similar pattern this year, in which organic growth will again grow to high single and near double digits in H2. We're about three points ahead of last year in organic growth, and given that trend, we expect to hit the overall growth numbers and for most of it to be organic when the year is over and the dust has settled. Importantly, our digital transformation capability grew 12% ex-advocacy with organic growth ex-advocacy of 7% in the quarter. This is a sharp contrast to the lagging performance seen in the larger digital transformation industry. Clients are beginning to incorporate AI in their consumer experiences, and the code and theory network is becoming a supplier of choice, having been named Digital Innovation Agency of the Year by campaigns. Our major tech clients grew 11% this quarter, and five of our top six clients are mega tech companies. People seem to tie our fortunes to tunes to tariffs and other old economy measures. We are a tech company's tech company and most affected by the ups and downs of that industry. Further evidence of AI being good for our business is reflected in that the marketing cloud grew 38% ex-advocacy. In 2Q in particular, the Harris Quest suite of research projects grew organically 100%. As we look across our agencies, many are performing strongly. The second quarter saw our leading creative agency, 72 and Sunny, grow net revenues 19% year over year. Research firm NRG grew 13%. Media buying business assembly grew 7%. And digital transformation agency, Kettle, grew 41%. Net new business was a standout once again. We delivered $117 million in a quarter, the fifth consecutive period, eclipsing the $100 million mark and bringing our trailing 12-month figure to $451 million. Wins with Samsung, New Balance, ServiceNow, and Volkswagen highlight the momentum as we continue to take share from legacy players. This quarter also saw our first wins in the newly formed government contracts division, which is beginning to come online with multiple pitches in the final stages. Allison Partners signed a three-year agreement with Covered California to help state health insurance marketplaces maximize the number of Californians enrolled in health insurance. We also delivered 93 million in adjusted EBITDA in the quarter, representing a 16% margin, flat versus prior year. But excluding advocacy, our adjusted EBITDA increased more than 23% year over year to $80 million. Adjusting for our cloud investment of 18 million this quarter, our second quarter market would have been about 18.5% representing a 300 basis point improvement from a year ago. And our adjusted EPS also increased by more than 20% year over year to 17 cents. The quarter also included the marketing effort, all the travel expenses of Sport Beach, our annual Cannes Lion Festival experience that brings together brands and world-class athletes, this continues to be so successful that it's becoming a business of its own as we create these experiences at different venues. Athletes like Serena Williams, Billie Jean King, Sir Mo Farah, Jordan Childs, and Alex Rodriguez participated. Our focus on cash management is paying off. Through a combination of implementation of technology for greater cash visibility, greater oversight of our brands, and successful renegotiation of payment terms with vendors, we've seen our cash flow from operations improved by $122 million year-to-date, setting us to achieve fully our goal of 45% free cash flow conversion at end of year. We're able to achieve a net leverage of 3.18 times, a significant improvement over the same point last year when leverage stood at 3.48, and putting us on course to finish the year with net leverage in the twos. This quarter, we invested in our stock, repurchasing almost 10 million shares at very attractive multiples. We also completed the acquisition of previously announced ADK Global in the second quarter, giving us offices in 10 new Asia-Pacific markets, aligning with our strategy of increasing global scale. And we took steps to strengthen our shopper and retail marketing by acquiring Jet Fuel. M&A remains a key growth driver for SkyBrow moving forward, but we do expect to slow down or outside acquisitions through the rest of the year. Our focus is on integrating the raft of companies acquired over the last 18 months and on scaling important technology initiatives to drive growth and efficiency. AI will most likely have the most direct impact on the production of mass content, which is a relatively small part of our business, as we tend to design premium content and develop the overall creative strategies. However, to reduce outside expenditures and stay current in production, we formally launched Unreasonable Studios, our award-winning in-house production and content creative company. It unites capabilities from multiple agencies into a centralized content production service. The team is already partnering with brands like Google, Starbucks, Hoka, Louis Vuitton, and Marriott to deliver everything from generative tech-driven content at scale to Netflix-quality original documentaries. We're continuing to work in partnership with Palantir to develop state-of-the-art data targeting as we develop the Stagwell ID graph, and we are testing with clients now. All of these new tools and systems will significantly upgrade our media offerings to be fully competitive against the majors when it comes to digital marketing, which in the world of AI is driven not by scale, but by effective technology, and that's exactly what we're developing. This quarter, we also announced the rebranding of the Stagwell Marketing Cloud to simply the Marketing Cloud. This new branding encourages use by other agencies and facilitates potential spinoff at the right time. You can check out the breadth of the new products, all available on a single platform, by logging on to www.themarketingcloud.com. In sum, we are well positioned for a successful second half, building on a strong half as new business continues to build, client size keeps increasing, digital transformation continues to grow, AI is being deployed, and the company improves in terms of cash, leverage, margin, and costs. As a result, we are reaffirming our guidance today. With that, I would like to hand it over to Frank Lenuto, EVP of Finance and Ryan Green, our new CFO, to walk through some of our financial results in more detail.

Thank you, Mark. It has been a privilege to serve as CFO for Stagwell and its predecessor for the last six years. I look forward to supporting Ryan moving forward as he takes over the reins. I have full confidence that he will build on our achievements and take Stagwell's finance function to new levels. Headlined by a significant improvement in cash flow from operations, Stagwell delivered solid second quarter financial results, which has positioned us well to achieve our full year guidance. For the quarter, we reported net revenue of $598 million, an increase of 8% over the prior year. Excluding advocacy, total net revenue grew 10%. In the quarter, digital transformation net revenue increased grew 6% to $109 million. Excluding advocacy, net revenue grew 12%. The continued resurgence in digital transformation was fueled by a 20% increase in revenue from technology clients, led by expansions at major tech companies, and a 36% increase in revenue from healthcare clients. The marketing cloud posted $66 million in net revenue in the quarter, an increase of 28% year over year. Excluding advocacy, net revenue grew 38%. We saw continued strong performance from our Harris Quest brand, which grew more than 180% in the second quarter, including 100% organic growth after recent product enhancements. Creativity and communications delivered $264 million in net revenue in a quarter, an increase of 8% over the prior period. Excluding advocacy, net revenue also grew 8%. The results were driven by strong performance with auto clients, which almost doubled year over year, and by a 67% increase with retail clients, as recent wins with Starbucks and General Motors begin to drive growth. Consumer insights and strategy continued its resurgence, posting $51 million in net revenue, an increase of 6% as compared to last year. The growth was led by a 12% year-over-year increase in revenue from technology clients and by a strong growth in the financial sector, which more than doubled year-over-year. Finally, performance median data returned to growth during the quarter, reporting $108 million in net revenue, an increase of 1% over the prior period. Moving to operating expenses, we continue to make progress against our goal of margin improvement through effective cost management. Personnel costs, excluding incentives, our largest expense came in at 62.6% in the second quarter. Excluding advocacy, the ratio was 63.2%, 110 basis points lower than last year. Both metrics represent the lowest Q2 ratios since 2023. Ryan will speak to our progress on the $80 to $100 million in tech-driven cost savings we announced at the Investor Day. But we are ahead of schedule and confident that a portion of these savings will flow through to adjusted EBITDA in the second half. Summarizing our operating results, we delivered $93 million in adjusted EBIT in the second quarter with a margin of 15.5% on net revenue, flat year over year. Excluding advocacy, our margin improved by approximately 160 basis points over the prior year to 14.3%. Excluding our cloud investment of $18 million this quarter, our second quarter adjusted EBITDA margin would have been approximately 18.5%, representing a 300 basis point improvement. 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 $92 million as of the end of the second quarter, 10 million lower than at the end of 2024. By the end of the year, DAC balances will reduce by nearly half, with the remaining balance spread over the next four to five years. During the quarter, we acquired approximately 9.6 million of our shares at an average price of $4.95 per share for approximately $48 million. Our buyback authorization as of the end of the second quarter has $160 million in remaining availability. For the six months ended June 30th, cash flows from operations improved by $122 million year over year, driven by a number of improvements in working capital management, which Ryan will discuss in greater detail. As a result, we ended the quarter with $181 million in cash and drawings under our revolver of $377 million, resulting in a net leverage ratio of 3.18 times, significantly better than the same point last year. We expect leverage at year-end will be in the twos. And finally, we are reiterating full year 2025 guidance today as follows. Total net revenue growth is expected to be approximately 8%. Adjusted EBITDA is expected to be between $410 million 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 $0.75 per share and $0.88 per share. I will now turn the call over to Ryan to discuss our progress on both cost savings and cash flow.