Stagwell Inc. Class A Common Stock 2026 Q3 Earnings Call

Morning, and thank you for joining us for Stagwell's third quarter earnings webcast. I'm Ben Allanson, and I lead the investor relations function here at Stagwell. With me are Mark Penn, Stagwell's Chairman and Chief Executive Officer, and Ryan Greene, Stagwell'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. Please do 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/investors, for an investor presentation and additional resources.

This morning's press release and the slide deck provide definitions, explanations, and reconciliations of non-GAAP financial data. With that, I'll turn the call over to Mark.

Thank you, Ben. Stagwell's third quarter demonstrates that we are successfully pivoting from a primarily marketing services company to a marketing transformation company, selling AI-based transformation software and services. We aim to be nothing less than number one in AI marketing transformation, which virtually every company in the world now needs alongside its HR, IT, supply chain, and other systems and software. As I've said many times, we're a tech company's tech company, and tech giants like ServiceNow, Adobe, and Palantir are working with Stagwell as their co-innovation partners to build and co-market cutting-edge agentic marketing solutions. We're bringing them to market, and they are second to none. As a consequence of our shift towards software and digital transformation, our third quarter was the biggest on record on virtually every metric. Revenue, net revenue, and adjusted EBITDA were all at the highest levels in the company history.

Last 12-month net new business was yet another record. Enterprise tech bookings year to date stand at $59 million, more than double our initial goal, and a healthy pipeline remaining through year-end. Our overall organic growth now leads the marketing services industry, and when you look at the segments, the growth in tech capabilities of our business rival that of successful software and service companies. Let me walk you through the numbers. Stagwell delivered 11% organic growth in the quarter and more than 7% organic net revenue growth. Growth was led by the segments at the center of our shift. Digital Transformation grew 23% organically, driving our two-year stack to 30%, our ninth consecutive quarter of two-year stack improvement. The Marketing Cloud grew 108% organically as software sales of our suite of new agentic AI products accelerated.

Political is running slightly ahead into the 2024 presidential year, helping communications grow 20% organically, a meaningful sequential improvement. Geographically, the U.S., our biggest region, grew more than 11% organically. This more than offset weakness in the Mid East, where we saw a $9 million or 2% organic headwind due to the ongoing conflict in the region and pause of work. Our shift towards higher growth, higher margin software and digital transformation, coupled with our commitment to cost controls, means that adjusted EBITDA grew 25% year-over-year to $145 million. This is a 22% margin, 290 basis points higher than a year ago. Our adjusted EPS grew 42% to $0.34. Meanwhile, year-to-date cash flow from operations has improved by $125 million, helping drive a same period, $93 million free cash flow improvement. Third quarter net leverage was 2.7 times, a 0.7 turn improvement year-over-year.

Net new business of $168 million, Stagwell's best ever third quarter. Our last 12 months figure stands at $586 million, 24% higher than a year ago. What is driving our record new business streak? It is what I said at the beginning of my remarks. Stagwell is the partner of choice for companies looking to transform their marketing. We are breaking into new industries and getting invited into new rooms. I have said on these calls that we see government as a real opportunity for Stagwell. Over the last two years, we have been building our team and gaining expertise. This work has paid off. In the third quarter, we won our first major federal assignment, which will really kick off beginning of the year. Stagwell will serve as the prime subcontractor to CACI for work with the U.S. Central Command. The total size of the win is $1.5 billion over five years.

We conservatively expect to capture 10% of this total size in fees, with potential for significantly more. Winning this first federal assignment is often the hard part. We are now established in the ecosystem, and new opportunities are emerging. Just weeks ago, we won a second significant federal assignment. Government-related work can become 10% or more of our business over time. The change obvious from our numbers is that our digital transformation services are just right for the agentic retooling companies need to do to stay competitive, and our products are just right for enabling large-scale marketing transformation. The Machines, as we call them, were crucial to our flagship win with ServiceNow, our largest ever multi-agency deal.

The unified family of products agentically manages all phases of marketing campaigns from orchestration to insight, audience selection, content tracking, and media placement. They significantly reduce the cost of a large enterprise of managing their global marketing units and campaigns. Importantly, they integrate with a company's own data and tech stack and can be run by them, not us. Customers may purchase individual Machines or products, or engage us for a full marketing transformation project, which is typically a $20 million-$40 million assignment with lasting long-term revenue. Based on my experience running Microsoft marketing, we can help clients save about $100 million a year or more in their marketing expenses. Our proven AI applications are unlike any of the so-called solutions out there. Many of them are all bark and no bite, all hat and no cattle, all smoke and no fire. You get the point. Just last week, we expanded our agreement with Palantir, strengthening the Stagwell Machines with Palantir's world-class data and engineering, working side by side with our team, headed by Chief AI Officer John Kahan, head of data and analytics at both Microsoft and IBM.

The agreement also named Stagwell as a Palantir Premier Marketing Transformation partner and establishes joint go-to-market to clients. Alex Karp, CEO of Palantir, specifically cited our advanced work on deploying sovereign models as the key to creating new opportunities. Earlier this week, we presented the sovereign model work with a travel client on the main stage at Palantir's top customer event. To bring our technology together under one umbrella, last week, we launched Stagwell AI, a single platform where you can find out about all our agentic products and services. Try this agentic website, stagwell.ai, for yourself or catch one of our ads on CNBC.

We also launched Stagwell Media earlier this month, bringing together Assembly's performance, heritage, and ecosystem expertise with a new model powered by next-generation agentic technology. Adweek noted this move, quote, "Fills a growing gap for clients," end quote, at a time when marketers are demanding greater agility, integration, and practical AI capabilities from their agency partners. We could not agree more. We expect to increase market penetration in the coming year, and we're doubling next year's bookings goal. Turning to capital allocation during the first nine months, we focused on buybacks and deferred M&A. We have now resumed a mix of buybacks, M&A, and leverage reduction. Owned media is an M&A priority because we see synergistic high-margin opportunities with our core businesses.

We increased our investment in RealClearPolitics, and we acquired Freestar after close of the quarter, a tech-driven ad operations platform serving over 1,000 websites, including blue-chip online publishers like Fortune and The Boston Globe. This gives us direct media pipeline for our clients that can be a win-win for them and us. Given our outsized growth in organic net revenue, adjusted EBITDA, and adjusted EPS, we are increasing our full-year outlook today. We still expect 8%-12% total net revenue growth and free cash conversion of 50%-60%, but we're raising our adjusted EBITDA and adjusted EPS guidance. We now expect adjusted EBITDA of $490 million-$540 million and adjusted EPS of $1.07-$1.21. Looking forward, 2027 is shaping up to be another strong year for Stagwell. Demand for our enterprise tech solutions is accelerating, which we expect will drive growth in The Marketing Cloud.

Today, I'm doubling our initial 2027 enterprise tech bookings goal to $150 million. Our pipeline in digital transformation is strong, and we expect organic growth trends to continue. Our marketing services and media segments are poised to return to single-digit growth with new wins coming online. The largest presidential cycle in history will kick off in earnest in the second half of 2027, with competitive political primaries expected on both sides of the aisle, and newly won government contracts and commercial assignments will kick in. In our view, Stagwell stock has strong upside potential, given strong year-to-date organic growth led by the successful pivot to AI marketing transformation. Do the math. Software and digital transformation revenue is worth two or three times that of marketing service revenue.

With double-digit growth in digital transformation and 30%-40% growth of software sales each year for the next two years, you can see a very different high-value company leveraging our thousands of relationships and deep enterprise in the marketing sector. We believe that could merit a stock price several times our existing value. But you be the judge. With that, I would like to hand it over to Ryan, who will walk you through the third quarter financials in more detail.

Thanks, Mark. Good morning and thank you for joining us. The third quarter was our strongest quarter in the history of the company. Revenue, net revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted EPS all set record highs. Revenue grew 10% to $816 million and net revenue grew 8% to $664 million. Organically, third quarter revenue grew 11% and net revenue grew more than 7%, representing our strongest growth in the last seven quarters. We expect the organic contribution to drive the majority of fourth quarter growth. Digital transformation, The Marketing Cloud, and communications led growth. Digital transformation net revenue increased 23% organically year over year to $119 million, driven by demand for technology implementation, integration, and workflow optimization, including capabilities associated with the Machine OS. We expect continued momentum in the fourth quarter.