Q2 2022 Stagwell Inc Earnings Call
$1.08 billion grew 19% with 20% organic growth versus the same period last year.
Excluding our advocacy businesses organic growth was 15% for the quarter and 19% for the first half of the year.
<unk> was strong across the digital layers of our principal capabilities pyramid, which were up 31% overall and accounted for 57% of net revenue in Q2.
Our digital transformation businesses grew 37% organically on top of the 51% organic growth in the prior year. This group was led by <unk>, our fully integrated agency within the Stag, while media network, which grew in the range of 150% organically code in theory and its engineering subsidiary.
<unk> grew more than 50% organically in Q2 compounded on similar growth in the prior year code and theories success continues to be driven by significant expansion and the scope and complexity of their engagements are online fundraising businesses also grew more than 50% organically in the quarter.
Yeah.
Our performance media and data layer, which includes most of the Stag won media network grew 17% organically on top of 18% growth in <unk> 2021, our flagship Omnichannel media business Assembly had a strong quarter as large contracts one in the previous six months scaled into the business stream.
<unk> was driven by our travel business, which nearly doubled in the second quarter with the recovery in travel volumes. The media network also integrated brand new Galaxy or full service scaled E. Commerce company. We acquired in April brand, New Galaxy has seen a raft of new business opportunities as agencies across.
The network are opening up client doors.
Our consumer insights and strategy businesses continue their strong growth with 27% organic growth in the second quarter on top of having grown 64% in Q2 2021.
NRG, our technology and entertainment content consultancy had another good quarter driven by growth with streaming gaming sports technology in film clients on the brand strategy side. The Harris poll had an equally strong quarter with significant gains in their SaaS product the Harris brand platform <unk>.
Lastly, our creativity and communications businesses grew 4% organically on top of prior year's significant 20% growth levels, our global PR business, Allison and partners grew roughly 20% driven by increased spending from existing clients, such as AB Inbev, Amazon and Google along with new business wins from.
Dyson and Intercontinental Hotel group, our creative and PR businesses made a strong stag will debut at the Cannes Festival of creativity, which made its pandemic come back in June anomaly, Forsman, and <unk> Observatory, Allison and partners brought home 18 prestigious clients from the south of France.
The poly's known as the Academy Awards of political advertising took place in May and SK Dk had an amazing night, winning six awards, including best overall television television campaign for <unk> Brown.
Adjusted EBITDA was $111 million for the second quarter, an increase of 13% versus the prior year, bringing our adjusted EBITDA to $213 million for the first half an increase of 22%.
We also generated $25 million of net income in the second quarter equating to <unk> <unk> of fully diluted earnings per share as we continue to grow quarter after quarter of positive net income.
Year to date, we've generated $58 million of net income and 18.
Fully diluted EPS on a full year basis, we expect a heavier weighting of EBITDA and earnings in the back half of the year due to the holiday seasonality and the impact of the election cycle at our advocacy businesses.
Q2, EBITDA margins were strong at 20% of net revenue, we incurred $4 million of incremental travel and entertainment expenses as in person pitches in the popular comps festival, we're back in full force and we still achieved a 20% margin far above most competitive.
Our continued focus on cost controls as evident in the improvement of our comp to revenue ratio, which fell to 63% in Q2 versus 65% in the prior year.
Our ability to control labor costs is assisted by our network of nearshore and offshore engineering talent with carefully integrated with onshore technology teams others in the industry have not been as careful balancing high growth and yet keeping productivity and check.
We expect to see margin expansion during the remainder of the year and continue to target 25 to 50 bps of annual margin expansion over the long term driven by a growing mix of higher margin digital capabilities net new business was $31 million in the quarter a healthy number after two record quarters of new business, we observed a rush.
New business heading into the end of 2021 as we came out of the pandemic a slowing of pitches in the beginning of Q2.
And now a resumption of strong opportunities as companies prepare for the end of the year and our successful 2023.
Our trailing 12 month net new business is $224 million.
We had numerous notable business wins and expansions across our principal capabilities and creativity and communications, we won business with the La Rams at 72, and Sunny Thomson Reuters at Sloane <unk> company, Good Rx and Tic Toc at Allison and partners and Johnson <unk> Johnson that donor consumer insights and strategy work with Metlife.
Harriss digital transfer agency <unk> business with the Mayo clinic, all coded theory won new business with Lenovo and significant expansion work with Jpmorgan Chase.
As we shift from pitches to deeper more lasting relationships more and more growth is coming from land and expand across larger clients, which is not captured in the net new business statistics. This is particularly true in the technology sector of our six largest clients for now Mega cap technology companies all of which reported.
Better than expected second quarter earnings without any cuts to their outlook.
After years of procurement separating media from creative the demands of the digital world, we're bringing them together again and we are responding to this trend. These new kids kind of media and creative and commerce hybrid accounts are helping fuel 33% growth in the media capability to further expand.
The media networks creative breath creative agencies, CPB Forsman <unk> Observatory in vitro are joining the stag will media network. Additionally, we're helping all our integrated agencies bring media capabilities in house by implementing the stag won't media studio these moves will enable.
All stack will agencies to offer different flavors of connected offerings between advertising and media to a broad mix of clients. We also made investments and progress in the <unk> marketing cloud our suite of SaaS and Daas tools built for in house marketers in July we announced the acquisition of Apollo program, a real time AI.
The power of SaaS platform that uncovers consumer creative and contextual insights for scaled modern marketing this data and analytics technology will be integrated into our consumer understanding and engagement platform, which we call Q4 enhanced audience identification and activation, we are bringing together a cloud specific engineering team.
We are on track to launch around our multi user augmented reality experience for live events and stadiums, which we are launching soon with the Minnesota Twins in June we also announced the acquisition of TMA direct which sits in the political data area of TMA will be bolted on to targeted victory.
And the combined entity will have an enhanced integrated data and technology offering to modernize how campaigns are funded and match our investments in the stairwell marketing cloud and acquisitions of Apollo and TMA are indicative of our growing focus on building more predictable and recurring revenue streams.
Two developing and acquiring software and data, we can leverage into our existing client flow.
Turning to the balance sheet and capital allocation, our net leverage stands at three onex LTM adjusted EBITDA of $416 million we.
<unk> leverage to decline meaningfully in both the third and fourth quarters as we generate significant free cash flow through the year and with bonus payments at nearly all of this year's back payments now behind us our LTM EBITDA is expanding in May Moody's upgraded <unk> corporate family rating to be more.
During the quarter, we also returned $15 million of capital to shareholders through our stock repurchase plan, which was announced in may leaving approximately $110 million of the $125 million repurchase repurchase authorization in place we continue to view our shares as being grossly undervalued.
Given our industry leading growth at high margins.
As a reminder, we're targeting an allocation of one third of free cash flow for M&A payments related to completed acquisitions, one third of free cash flow towards new M&A and one third towards a mix of debt reduction and share purchases.
In sum.
One year after the combination <unk> is showing we can maintain growth in margins at industry, leading levels <unk> is achieving our goal of being the first viable alternative to the legacy holding companies in decades.
Investments in the <unk> marketing cloud proprietary software and data position us for continued technology leadership and marketplace expansion.
And as we scale the network, we're doing the hard work to fortify and optimize our corporate infrastructure to support future growth and profitability.
With that I am pleased to present, a brief video recapping, our second quarter results after which our CFO Franklin <unk> will discuss our second quarter financials in more detail. As a reminder, you can ask questions via the chatbot.
Let's roll the video.
Another strong quarter for marketable performance as we celebrate stag wells first birthday.
Our results show Stag well is the challenger network built to transform marketing take a look at our impressive performance in Q2 2022.
We delivered industry, leading growth and margins, including $556 million in net revenue and $111 million and adjusted EBITDA.
Driven by growth in two key areas, our media network is breaking out.
In our digital acceleration continues stag.
<unk> is the only full service marketing network with a digital majority revenue mix with 57% of our net revenue from digital services, we're creating transformational work with amazing clients driving innovation globally.
And investing in the stag well marketing cloud all while remaining disciplined on costs.
To navigate the uncertainties the future may bring.
And reiterating 2022 guidance.
Q2 2022.
Another great step forward.
We're just getting started.
Thanks Martin.
Good morning, everyone.
We're pleased to have you join us today to discuss our Q2 and six month results.
As has been the case with our recent post merger results. My comments today will include a limited discussion of our GAAP results, which will be then supplemented with pro forma combined results as if the business combination had occurred on January one 2021.
Supplemental pro forma results will provide useful information.
To evaluate.
Performance.
Revenue for Q2 was $673 million versus $210 million for the same period the prior year.
Or an increase of 221% net.
Net revenue excluding pass through costs was $556 million versus $182 million in the prior period or an increase of 200% to 6%.
For the six months revenue was 1.32 billion.
$391 million for the same period in the prior year or an increase of 237%.
Net revenue excluding pass through costs was 1.08 billion.
$340 million in the prior period.
<unk> an increase of 219%.
Adjusted EBITDA for Q2 was $111 million versus $39 million.
Same period in the prior year or an increase of 188%.
For the six months adjusted EBITDA was $213 million versus $63 million for the same period in the prior year.
Or an increase of 240%.
Now the remainder of my comments will now focus on the pro forma results of the combined company for the second quarter and the six months.
Revenue for Q2 was $673 million versus $555 million in the prior period or an increase of 21%.
Net revenue for the quarter, excluding pass through costs increased 16% to $556 million.
From $480 million in the prior year.
Excluding advocacy revenue and net revenue increased 19% and 15% respectively.
For the six months revenue increased to 1.32 billion from $1.04 billion in the prior year or an increase of 26%.
Net revenue excluding pass through costs increased to 1.08 billion.
From $909 million in the prior year.
Or an increase of 19%.
Excluding advocacy revenue and net revenue increased 24% and 18% respectively.
And on an organic basis, net revenue increased by 16% and 20% for the quarter and six months respectively.
As you know we report our revenue by both our reportable segments and our principal capabilities.
As Mark has already discussed our performance by principal capabilities in his remarks I won't repeat those details here.
And with that let me turn to our segments, we have three reportable segments, consisting of the integrated agencies network.
The media network and the Communications network.
During the quarter, we repositioned certain of our businesses between these reportable segments to enhance our go to market strategy.
And more closely integrate our media and creative capabilities.
Please refer to our forthcoming second quarter Form 10-Q for the details of the components of the reportable segments.
I will now discuss the operating results of each of these segments.
Beginning with integrated agencies, our largest segment organic net revenue grew by $27 million and $79 million or 9% and 15% in Q2 and for the six months respectively.
Driven by strength in digital integrated pitches and larger contract wins.
The media network increased its organic net revenue by $36 million and $68 million or 28% and 27% in Q2 after the six months respectively.
Driven by demand for our digital services, several $10 million contract wins and growth in our travel related business.
Organic net revenue in the communications segment increased by $15 million and $30 million or 28% and 30% in Q2 and for the six months, respectively, driven by the ramp up in our advocacy business and midterm election year.
And now turning to costs adjusted EBITDA increased in Q2 to $111 million or 13% from $99 million in the prior period with an EBITDA margin of 20% slightly lower from the prior period by approximately 50 basis points.
Excluding advocacy adjusted EBITDA increased 11% with margins of 19, 2% down approximately 55 basis points from a year ago.
The slight decrease in EBITDA margin for the quarter is attributable to increased expenses associated with new business pitches.
Certain unbelievable direct cost tied to revenue growth at several of our businesses and an increase in travel and entertainment as in person meetings are gradually returning.
All partially offset by a lower compensation to revenue ratio as the company has effectively managed its single largest expense in a period of wage inflation.
For the six months adjusted EBITDA increased to $213 million or approximately 22% versus 174 million in the prior period with an EBITDA margin 19, 6%.
Higher from the prior period by approximately 50 basis points.
Excluding advocacy adjusted EBITDA increased 21% with our EBITDA margin rising to 18, 8% from 18, 4%.
We continue to make progress with our cost synergies initiatives during the quarter, we took charges of approximately $1 8 million principally.
Four reduced head count and systems implementations with expected full year savings of approximately $5 $3 million.
From inception to date, we have taken charges of approximately $3 $6 million with expected savings in 2022 of $14 1 million.
The annualized run rate savings of $17 2 million.
We remain on our schedule.
<unk> $30 million and run rate cost savings by the end of 2023.
And now turning to our balance sheet.
During the quarter. The company completed the previously disclosed acquisition of brand New Galaxy, a leading provider of scaled commerce and marketplace solutions.
And TMA direct or direct response firm and the political data and marketing arena.
In total the company's M&A related obligations, which include deferred acquisition consideration redeemable noncontrolling interests and profits interests decreased from $306 million in Q1 to $277 million.
Capex for the quarter and the six months was $7 9 million and $14 5 million, respectively, or approximately 1% of year to date revenue in line with our previous estimates.
We also acquired approximately $15 million of our shares through our stock repurchase program during the quarter returning capital to our shareholders.
We have approximately $110 million remaining under our 125 million authorization.
And during the quarter Moody's Investor service increased our corporate family credit rating to <unk> from B to citing the company's operating momentum and focus on deleveraging.
Moving to liquidity, we ended the quarter with $93 million in cash and approximately $298 million drawn against our $500 million revolver.
We expect this to be the high watermark of borrowings for the year with rejection reductions projected in the following two quarters driven by the cyclicality of the business.
Our total leverage ratio at June 30 was 327 times, excluding M&A obligations, our net leverage was three one times.
And finally moving to guidance the company is reaffirming its full year guidance of pro forma net revenue growth of 18% to 22%.
Pro forma net revenue growth, excluding advocacy of 13% to 17%.
And adjusted EBITDA of $450 million to $480 million.
Our outlook is based on prevailing macro conditions and does not reflect any significant adverse impact from changes in foreign exchange rates or the ongoing war in Ukraine.
That concludes our prepared remarks for this morning. Thank you.
We'll now open it up for Q&A.
Please submit your questions via the chat button at the top of your screen.
The first question I, just wanted to apologize for the background noise from that when that last year at one world trade, we'll definitely clear.
Schedule with them beforehand next time.
So the first question is from Mark.
Got it thanks.
From benchmark.
Margin, Frank nice quarter on a tough comp two questions. The first on advocacy and particularly targeted victory just curious how fluid. Those dollars are now in front of the midterms or said differently, how much of your Q H advocacy.
Circled versus what could surprise you to the upside.
I think that what we've seen in general is a pattern in which the mid terms that follow a presidential election.
There are about.
Equal to the past previous selection and then the next presidential election, trumps up even higher because there is a pattern of secular growth. So we raised about $1 billion last time, we expect to raise a $1 billion two to $1 three.
Again, we don't know how much politics will will heat up even further given the introduction of additional issues such as.
Into the political stream, but those are our estimates and we appear to be on track with those estimates we have in the past something like an additional runoff in Georgia last time, then then triggered a whole another round of fundraising that otherwise wouldn't have existed.
Always possible always possible that events like that will occur again.
Second question for Mark what is your current visibility.
<unk> scale rfps for the remainder of the year and how do you see your positioning do you expect the macro environment have any impact here and example, e&ps rfps on pause.
As I said in my remarks, we actually are seeing the opposite now.
After the rush of new business going into the beginning of the year, we saw a slight low in pitches, but when we got back from Con, we really saw a flood of new pitches were now up for a RASK of very significant $10 million pitches, which have opened up most of it.
Which are due between now and and.
And fall or late fall.
To be resolved. So we are seeing here, a very healthy pitch market.
Have not seen that resumption that might've been turned but what I really saw was a flood of those things I think there are one or two things that are in the trades, where you'll see that we're in the finals for $20 million plus pitches.
We announced just today.
Top golf.
Was won by anomaly.
We're just seeing not seen any kind of slowdown or pausing and pitches right now in this industry.
Great.
Next question is from Avi Steiner at Jpmorgan.
Many of the digital only platforms have highlighted allowing AD spend in the second half is that whilst collection of agencies seeing any slowdown in that.
Growth backdrop or other factors.
Again remember that.
<unk> is principally online buying and performance oriented media. So it's less likely I think contrary to some articles I've seen that companies are going to cut revenue producing media theyre going to cut non revenue producing mucus remember our growth is on digital first our growth is strong.
Because of the tech stack that we have in media.
I think we have more insularity from any such wins, but are we seeing them no. We're seeing a very strong.
Travel and entertainment summer a rebound in our travel business and what looks like what's going to be a very market competitive.
Holiday season, and people are gearing up for that holiday season remember the fed is trying to restrain the economy, particularly the consumer economy, and we are beneficiaries of that hot consumer economy, if and when I see something different I'll report. It. It's just not what we see in terms of how our clients are active.
From Avi the company's revolver balance per the slide does that elevated levels can we expect cash generated in the second half to pay that balance down beyond the one third cash allocation.
Comments any guidance as to where the revolver balance.
Yes.
I don't think we give specific guidance, but in general yes, I think as Frank pointed out we're at a high watermark, having both launched a number of acquisitions all of the DAC payments all of the taxes.
Taxes.
Bonus payments in terms of the security of the year as well as having strong growth in the business, we expect that to come down.
Very significantly by the end of the year as the cash flow into the end of the year.
It is realized and particularly that also as the as the political season heats up.
Frank anything to add no I think you've covered it mark and I did address it in the script and.
And there is also the optionality of what we do with the free cash it's not locked in at one third for each bucket.
The opportunities arise you may do other things.
Next question comes from Steve Chahal at Wells Fargo, with QQ, serving as our toughest comp of the year, how should we be thinking about the shape of organic growth in the back half Relatedly, we've seen mixed signals from different portions of the advertising market.
Agencies like yourself have continued to grow strongly above search social CTV has started to see some deceleration how can we square what youre seeing in the AD market with some of the numbers coming out of that.
And platforms.
Add market overall, it's difficult to read because there are two or three trends happening at once and then <unk>.
I think what Youre seeing is.
<unk> competition.
In online.
<unk> advertising industry itself Youre seeing tick tock come in Youre seeing new marketplaces come in Youre seeing that people have more than two choices now and their placement.
The number of choices.
When Netflix App advertising.
Excuse me will only expand.
I think that the market is going to be increasingly spread out and harder to read the second train, but I think youre seeing is continued movement from offline to digital media placement and then Youll see stag ROE here that <unk> is.
It is also gaining market share in the face of those two trends both of which are quite favorable to its formula or mix of companies.
The next question comes from an Investor what are your thoughts on buying back bonds, given the significant discount to par would not be highly accretive to stock.
I don't know I don't want to comment on that directly I did in the past.
Buy some bonds back.
There is.
Credit market is showing it.
No.
Various shifts right now we have $125 billion.
Stock buyback.
Authorization program. So I don't think I'd comment I appreciate your observation.
And the next question comes from an Investor you mentioned your comp to revenue ratio control of compensation. During the recent inflation has this affected staff churn and productivity and is this a concern for the second.
No I think that we're seeing really great productivity in the agencies and what you're really seeing is we don't manage to specific comp we managed comp to revenue ratio that means that what we look for is higher productivity employees, some of which who may be paid even more.
And then we've also as we pointed out had been successful at distributing.
The workforce, both nationally and internationally and ways to keep our comp to revenue down. So I think we're at some other companies I've seen the controls might be as tight as we have I think we've successfully manage the combination of productivity attracting great talent remember.
We're now actually at about 13600 people. So we have added literally thousands of people to the company and we've been a very attractive growing place for people to come in the marketing industry and so I think we are successfully adding people and we're doing so prudently in a way that creates lasting great careers.
For people.
And that concludes our question and then I'll turn it back to Mark any closing comments.
Thank you I hope investors will see that it's been another strong quarter.
Strong quarter of growth.
We remain on track to really.
18% to 22%.
Industry, leading growth at the same time, while maintaining.
Strong margins and profitability that we're managing to both put in the kinds of infrastructure that I think will lead to long term controls and infrastructure and just the right way at the same time, we are doing Amazing award winning creative work the products 18, Lyons and that I believe is.
Now as I believe them, but having the right mix between all of the digital Sciences. The data the media and award winning creativity is the way that we can expand to become a major player in this marketplace and on top of that we are building, our SaaS and daas marketing cloud more.
To come thank you very much.