Stagwell Inc.

Good morning from Sagwell's office in Miami. Welcome to Sagwell's third quarter 2025 earnings webcast. My name is Ben Allison, and I'm in the investor relations function here at Sagwell. With me today are Mark Penn, Sagwell's chairman and chief executive officer, and Ryan Green, Sagwell's chief financial officer. Mark will provide a business update before Ryan shares 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 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 pilots. 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-capital financial data. And with that, I'd like to turn the call over to our Chairman and CEO, Mark Pett.

Thank you, Ben. In an industry undergoing major transformation, there are winners and there are losers. This quarter, This quarter, coming on top of consistent, sequential, and year-over-year growth in our non-advocacy net revenue, we're clearly positioned as one of the winners. And today's game-changing volunteer announcement is another example of that. The overall revenue number of $743 million and net revenue of $615 million reflects 12% and 10% ex-advocacy increases over last year. On a two-year stack basis, our organic advocacy growth was 8.4%, a meaningful acceleration over the first two quarters, which both came in and about 1%. We expect this figure to be in double digits in the fourth quarter. Ex-advocacy EBITDA jumped 23% year-over-year to $103 million, and our ex-advocacy margin of 18% is the highest we have achieved in two years. Brian will talk more about the cost reduction efforts that are clearly working. Our adjusted earnings per share of 24 cents is up 9% from third quarter last year, and our year-to-date cash flow from operations increased $100 million. Our LPM net new business increased to a record number of $472 million, and top client relationships continue to expand significantly. A top 25 client is now an average $28 million relationship. Our current pipeline of half a billion dollars remains at its highest levels. Marketing services total net revenue grew 9% and digital transformation increased by 12%. And organic growth in our key segments was strong as well. Marketing services grew 6.5% organically overall and 9% in the U.S. market. Digital transformation grew at 7% organically and 7% organically in the U.S. While many of the competitors in the industry are shrinking and shredding operations, we are growing and meeting the demands of the new world of AI. Investors have asked, given all these trends, why is organic growth not even higher? The answer is our client base is undergoing significant transformation. Our bigger clients are getting bigger, while our smaller clients of 500,000 and under are turning over. This shift towards achieving larger-scale customer relationships when complete will result in higher and more consistent growth. We're putting in additional rewards for client retention and expansion. We are aiming to cut client shrinkage by five points next year and conveniently improve organic growth. Another factor is the slowdown in the communications vertical, reflecting industry-wide issues in that segment. We expect the trends in advocacy companies to reverse themselves next year in what promises to be a banner politically here. We are also doubling the size of our new business team to cover all major sectors and geographies and to extend the efforts with government contracts and additional technology services. Our CMO, Ryan Linder, a leader in the industry, is spearheading this effort to take advantage of our growing market position. In terms of our strategy, We have made a major pivot from M&A to technology development this year in response to the reality of AI. It's a technology that touches everything, and as a former Microsoft Chief Strategy Officer myself, I have put together a top-tier team with John Cahen, formerly of Microsoft and IBM, Slavi Samajjadzada, and from Omnicom, working with Mansur Basha, Ramon, and the entire code and theory team headed by Dan Gardner. Nothing is more important in this industry today than being a leader in AI. We are in an ideal position as a newer, technology-first company at our side to adopt technology as we grow compared to some of the behemoths in the industry who have massive legacy assets and have proven hard to transform. As part of the objective of leading in AI this morning, we announced a partnership with Palantir to build a groundbreaking industry-first audience platform that unlocks new ROI for corporate marketers. This platform is the holy grail of marketing, finally brought to light. Building our proprietary algorithms and data on top of the Palantir Foundry will be able to offer clients access to a first-of-its-kind central hub for marketing and targeting designed to activate AI-enabled decision-making and support a wide range of use cases, such as audience creation, creative development and testing, and campaign management. The platform is AI-based to enable large companies to access and attend tens of millions of records of marketing and sales data and to create agents that will then implement complex marketing processes and campaigns. Demos of the products are available upon request. In addition to adopting it internally, we will sell it as a standalone platform that companies can use to monitor and enhance their marketing efforts and adopt highly personalized marketing strategies down to the retail outlet and individual customer. This is a new business line for Stagwell, and working together with Palantir, the goal is a significant one, creating products to generate potentially hundreds of millions of dollars in new revenue. We are also partnering with Adobe on the content management piece of our new products. The first client peaks of this emerging technology have been favorable. We've developed an MVP over the last five months and expect to have advanced versions in the market within months, and demos will be available for qualified clients. In addition, the marketing cloud segment, which now reflects our suite of SaaS products, saw excellent net revenue growth of 138% in the quarter, led once again by outstanding organic growth of 57% in our Harris Insight suite of research products and strong contributions from recent acquisitions. Adjusted EBITDA margin in the marketing cloud was negative 4%, a significant improvement over the negative 30% margin posted in the same period last year. We're on track to deliver positive adjusted EBITDA in late 2026. As previously mentioned, The key potential strategy here will be to spin off the marketing cloud at a certain point if its full value is not recognized internally. As part of this pivot, we also invested about $35 million this quarter in continuing to strengthen our tech capabilities, including investing in the marketing cloud, building out the machine, the operating system for all our agencies, and rolling out the SkyGlo content supply chain internally. built on top of the Adobe stack. This investment enabled the marketing cloud to launch Agent Cloud just two weeks ago. This unified platform gives brands instant access to multiple LLMs, image video tools, and custom AI agent creation all in one place, setting teams up for fully agentic workflows. Another part of our strategy is to expand our own media properties so that we can offer our clients great locale opportunities for ROI. We just announced the acquisition of a 35% stake in Real Fair Holding, which would now expand to 37.5% publisher of Real Fair Politics, and 12 other news and analysis sites. This is on top of our screens at airports, travel publications, and programmatic B2B media we own and operate. We have now launched the Bagwell Media Platform to bring our principal media to the market. At our current multiple, there's no investment we can find that's better than our own shares given our growth in cash flow and technology development. So a major use of capital this year was buying our own shares and we purchased 90 million shares, $90 million worth of shares to date. The basic share count now is $252 million, down 4% from last year. As part of the technology pivot, We did not acquire the plan's $100 million of new revenue this year, but only about $65 million. But we've had increased organic growth in our core businesses and improved margins. We expect a strong finish. The fourth borders are typically our strongest, and we expect to be within the specified ranges on all metrics. As to guidance for the closing year, we're reiterating the outlook of approximately 8% total net revenue growth, 410 to 460 million in adjusted EBITDA, 75 cents to 88 cents in adjusted EPS, and 45% free cash flow conversion. Looking into next year, we believe that our strength is building. Our core services are showing strong, expanding pipelines and organic growth. Our media business is being bolstered by the development of new technology, engines that will be deployed to foster even more growth here. The marketing cloud is turning a corner and the new partnership with Palantir will yield new products. On top of this, we expect a huge political season, and the cash demand's deferred acquisition payments next year are close to zero. Along with lower interest rates and the advantages of the new tax bill, these developments will free up considerable cash above the 45% level. We'll continue to evaluate the best ways to enhance shareholder value as it becomes clearer to the marketplace that we are one of the winners able to meet the challenges formative technology, and be a leader in the deployment of it. Thank you very much. Let me turn it over to Brian.

Thanks, Mark. Today, I'll walk you through key reporting changes and an overview of our financial performance. This quarter, we adopted a new structure with five segments, marketing services, media and commerce, digital transformation, communication, and the marketing cloud. The design has simplified reporting and improved risk guarantee. The advocacy adjustments are now limited to a single segment, communications, streamlining disclosures. please refer to the revised earnings presentation and investor supplement posted on the investor relations section of our website for restatement of prior period results and contribution percentages under the new framework. We also redefined our organic growth calculation. Revenue from acquisition is now considered inorganic 12 months post-close. This approach mirrors a leading competitor and provides a clearer view of staggered performance. Now turning to our results. In Q3, we generated $743 million of revenue. Net revenue was $615 million, up 5.9% year-over-year. Reported organic growth was down 0.4%, but when adjusted for advocacy, organic growth was 3.2%, with nearly all statements achieving higher levels. Net revenue excluding advocacy has accelerated throughout the year, 9.1% in Q2, 9.9% in Q2, and 10.2% in Q3. Adjusted EBITDA was $115 million, up 3% year-over-year, even without the higher gains from cyclical political work. Adjusted EBITDA margin on net revenue was 18.6%. Adjusted net income was $63 million, up 6%. Despite the advocacy pullback, adjusted EPS for the quarter increased 9% to 24 cents. Looking at our geographical performance, the U.S. remained our largest market and key growth driver. Net revenue rose 1.1% year over year. Excluding advocacy, total growth was 5.9%, with organic growth of 5.2%. International total net revenue grew 25.9%, led by EMEA, with a 39.6% increase. Let's take a closer look at how our operating segments contributed to overall performance. Starting with the marketing cloud, this segment grew 9.2% year-over-year to $246 million in net revenue. Adjusted EBITDA was $57 million, with a margin of 23%. Strength in brand strategy, performance creator, and research reflects steady demand across diverse client base. Next, digital transformation delivered $95 million in net revenue, representing growth of 11.9%. Adjusted EBITDA was $26 million, a margin of 27.1%. Demand continues to build around AI, experience design, and platform enablement, especially among enterprise clients. Media and commerce contributed $154 million. Growth of 5.9% was driven by multi-channel and performance media campaigns across Europe, the U.S., and Latin America. Assembly, a leading media agency, delivered 20% growth, a 14-point sequential improvement, driving stronger overall performance. Adjuncted EBITDA for this segment was $25 million, a margin of 16%. Communications generated $97 million in net revenue, including $37 million in advocacy work. Excluding advocacy, PR results were softer, reflecting broader industry headwinds due to elongated pitches, cycles, and slower client positions. Despite these headwinds, we maintained cost discipline to protect margin. Adjuncted EBITDA was $25 million, a 26% margin. The marketing cloud contributed $27 million, growing 138%. This segment now includes only our suite of SaaS and DAS products. Growth is driven by continued adoption of proprietary software platforms and analytic solutions. This includes 50 for 7 organic growth at Research Platform Quest, along with contributions from M&A. Adjusted EBITDA was a loss of $1.1 million, reflecting a margin of negative 4.1%. This was a year-over-year improvement of $2.3 million in EBITDA and a 26% margin improvement from negative 30% in the same quarter last year. We remain on track to achieve positive adjusted EBITDA in the second half of 2026. Nearly all segments reported positive organic growth. Excluding communications, total net revenue for all remaining segments was 11%, or 5% organically. Building on that performance, we remain focused on margin execution and expense management. Our priority is driving top-line growth while maintaining cost discipline. With a flexible cost structure, we can respond quickly to changing conditions, as seen in our public relations results. This positions us to sustain margin and investment growth by protecting profitability. Company-wide adjusted EBITDA margin was 18.6%, a sequential improvement of 310 basis points. Compared to Q3 2024, margin declined 60 basis points due to lower advocacy. However, excluding advocacy, margins rose 200 basis points year-over-year, driven both by revenue growth and labor cost controls. Turning to the Quad Savings Initiative announced at our investor day, we remain on track to deliver $80 to $100 million in annualized savings by the end of 2026, with $60 to $70 million this year. Since announcing this initiative in April, approximately $27 million of savings have already been actioned. One of our principal initiatives is the rollout of the Stagwell Content Supply Chain, a foundational effort transforming how work gets done. It focuses on integrating technology for content creation, streamlined workflows that reduce low-value tasks, and reducing reliance on third parties. and standardized process for training to embed lasting change across agencies. Adoption has been strong. Usage of foundational AI tools has more than doubled since Q2. We are already seeing results. On the revenue side, AI-powered concept production is helping us win new business in automotive, gaming, retail, and tech. On the margin side, the platform is streamlining workflows and improving efficiencies. Generative AI token usage is up 40% since Q2, showing strong adoption and impact. In addition to margin execution, our approach to cash flow and capital allocation remains a clear lever in driving shareholder value. Cash flow from operations year-to-date was $31 million, up $100 million year-over-year. This reflects the same benefits from working capital initiatives, including media system rollouts, shared service migrations, and tighter oversight. We've also reached a scale that allowed us to negotiate better terms with certain media partners globally, easing working capital constraints. We view these gains as sustainable and believe this strength is not fully reflected in our current trading multiples. Turning to capital deployment, year-to-date CapEx totaled $72 million, including $45 million in capitalized software, primarily supporting technology investment in the machine, the Stagwell content supply chain, market research platform, and ongoing product development with the marketing cloud. Additionally, $26 million was invested in acquisition of key data assets underpinning our IP platforms, along with necessary technology refreshes and lethal improvements. We were purchased 7 million shares for $37 million in Q3, bringing our year-to-date repurchases to 17.6 million shares for $90 million. $80 million remains available under our approved plan. Our net leverage stood at 3.4 times our quarter end. With Q4 typically our strongest cash period, we continue to target net leverage below three times by year-end. We ended this quarter with $132 million in cash to maintain strong liquidity, including $312 million available under our revolving credit facility. Looking ahead, we remain focused on generating strong operating cash flow to support strategic initiatives. Our approach has evolved throughout the year, shifting from acquisitions to investing in technology that position us to lead and grow as the industry evolves. The momentum we built throughout the third quarter gives us the visibility to reiterate our full-year guidance. We expect approximately 8% total net revenue growth, $410 to $460 million in adjusted EBITDA, $0.75 to $0.88 in adjusted EPS, and free cash flow conversion of approximately 45%. With that, I will turn it back over to Ben for questions.