Q3 2024 Stagwell Inc Earnings Call
growth in the third quarter. This growth is led by 85% growth in advocacy, 25% in digital transformation, and 30% growth in the spendable marketing plan.
We generated $580 million of net revenue, representing 8.5% total growth and 8% organic growth year-over-year, the best in the industry.
Our adjusted EBITDA came in at $111 million in 3Q, even as we continue to invest $18 million of OPEX this quarter in growing our cloud and AI-based software solutions.
Stagwell is a tech company's tech company.
We are working to develop applications, reimagine consumer interfaces, and deliver marketing solutions for the AI businesses of almost every FANG company.
One cannot underestimate the workflow that will be required to make AI usable by consumers and the role our code and theory networks will play in bringing that about for tech and non-tech companies.
While I have seen the digital transformation businesses of others falter, we are experiencing the opposite here and have strengthened our capabilities by bringing together all our digital transformation resources into a single network.
The Code and Theory Network just won an AGES 2024 Business Transformation Agency of the Year Award, recognizing its outstanding work to help businesses get ready for the AI era.
For example, we're at the forefront of applying AI and helping voters understand politics. We designed and built the magic walls used on election night at both CNN and NBC.
Our recent redesign of the RealClear polling site incorporates an AI bot that will answer complex questions on polling information not just with text, but also with graphical information, which is a breakthrough in AI to consumer communication.
You can learn more about the work we are doing with AI at www.stackwell.ai
The Stackholm Marketing Cloud Group has shown strong growth in the third quarter as well, growing 30% year-over-year to $74 million.
SMC grew 26% net revenue terms to $59 billion, representing 23% organic net revenue growth.
Key elements of this growth are the early July edition of Bera.ai, a research tool that lets marketers and financial analysts compute the value of brand reputation and track it in the marketplace.
Marketers can work aim to justify their expenditures on brand marketing with this sophisticated tool by using it to predict the enhanced value of marketing expenditures.
Barrett is part of a recently inked $15 million five-year ARR deal with a major payments company in the United States.
Another SMC product, Wonder Cave, our best-in-class AI-powered text messaging platform.
has been successfully leveraged by more than 500 political and advocacy organizations throughout the political season. More than 4 billion text messages have been sent during this cycle to support these organizations' fundraising, voter contact, and get-out-the-vote efforts.
Wondertame is also branching out from its political origins and helping brands with their customer engagement. From February to September this year, the number of messages sent by non-advocacy brands increased by more than 500%.
around our augmented reality experience for stadiums and sports broadcasts continues to gain traction as it held an unprecedented event with the LA Rams bringing a fantasy experience to fans that was sponsored by Uber Eats and Princess Cruises.
We're continuing to strengthen the global nature of our network to achieve more scaled global assignments.
We acquired Consul, a well-known government relations agency based in Mida, and are actively working with them to expand our presence in the region. I am recently back from a successful trip there, and I believe we can achieve significant expansion in the area.
We also expanded the sampling enforcement in voting quarters in the region, and now have in total nearly 500 people there. The region's revenue grew 128% year-over-year on the third quarter, and has grown 88% year-to-date. We expect this kind of growth to impede itself next year.
Other steps we have taken include the acquisition of leaders, an Israeli social influencer and engagement agency and platform. It expands our social content creation capabilities and upgrades our influencer marketing platform offerings.
Our advocacy businesses continue to perform extremely well.
with the momentum continuing past the end of the quarter to election day.
Advocacy Revenue grew 85% year-over-year on the third quarter.
With the election outcome, we expect that public affairs and issue advocacy campaigns will surge in 2025.
given legislative opportunities and the entire sector will continue to grow as 2028 will likely be the biggest election in history given the need for primaries on both sides.
Other key elements of our strategy that we're in the process of bringing for next year include a staggered ID graph used to centralize all our data and information to better target consumers.
We're also building what we call The Machine, a fully integrated AI-based content development platform built in conjunction with Adobe. We believe this will be the backbone of our technological differentiation in the new world of AI-based content.
We expect this to be ready in the next six months. In addition to the wins now coming online, our pipeline is at record levels of 30% over the previous year, and we're participating in multiple large pitches right now.
We are also seeing more work being awarded without pitches from major clients, indicating a good environment for our work and the marketplace generally.
As Frank will detail, we continue to hold the line on expenses, keeping our comp-to-revenue expense at about 61% this quarter.
We continue to see our stock as undervalued, given our enhanced industry position, solid growth, and good cost management, and have continued our buyback program, expanding it by another 125 million dollars.
Our industry-leading growth is a reflection, we believe, and the strategy we have pursued in combining the right balance of creativity and technology that will be needed in the AI era.
This is reflected in our winning both new global creative assignments and cutting-edge technology deployment assignments.
at the same time, wisely pursued business in key development segments like advocacy.
that will continue to grow over time and stadium experiences that are simply nascent.
This is what makes us increasingly attractive to large brands as the challenger marketing and technology company. Now I'll hand things over to Fernando, our Chief Financial Officer, to walk you through some of our financial results in more detail.
Fernando: Thank you, Mark. Good morning everyone, and thank you for joining us to discuss our third quarter results. As a reminder, if you would like to ask a question after prepared remarks conclude, please feel free to submit them through the chat function.
Fernando: Stagwell delivered solid third quarter financial results with growth in all five of our principal capabilities.
For the quarter, we reported revenue of $711 million, an increase of 15% as compared to the same period in the prior year, and net revenue of $580 million, an increase of 8% over the prior year.
Fernando: Turning to revenue by capability, all five principal capabilities grew in Q3. Growth in digital transformation accelerated during the quarter, increasing to $163 million, a 25% improvement over the prior period.
Fernando: While advocacy grew 59%, growth ex-advocacy also increased 16%, partially powered by AI-driven activities and digital transformation.
Fernando: Staggrell Marketing Cloud posted 74 million dollars in revenue, an increase of 30% year-over-year, driven by significant growth in WonderCave as well as strength among our travel, health care, and retail customers.
Fernando: Consumer Insights and Strategy reported 47 million dollars in revenue, an increase of 7% as compared to the comparable period last year.
Fernando: This was partially driven by the rebound in Hollywood-based media-focused research, as well as increased project size and new business among technology, gaming, communications, and automotive clients.
Fernando: Performance Media and Data delivered $80 million in revenue, an increase of 9% over the prior year period.
Fernando: The growth was driven by continued strength in the consumer products and business services sectors, and was further supported by a recent return to growth in technology. And, creativity and communications delivered $334 million in revenue, an increase of 11% over the prior period.
Fernando: These results were driven by growth among clients in the retail, technology, and consumer sectors, as well as by strength in our advocacy businesses.
Fernando: Moving to operating expenses, we continue to improve margins through effective cost management.
Fernando: Personnel staffing costs, excluding incentives, our single largest expense, declined as a percentage of net revenue by 179 basis points to 60.9 percent versus the prior period.
Fernando: We also made progress with G&A expenses. Continued real estate consolidation into centrally located regional hubs helped to reduce such costs by approximately 8% year-over-year.
Fernando: Our Shared Services Initiative also contributed to annualized cost savings of approximately $10 million through reductions in accounting, IT, and HR as we continue to centralize such functions.
Fernando: These savings were partially offset by increased direct unbillable expenses and other OPEX related to higher revenues and client servicing activities.
Fernando: As a result, Stagwell delivered $111 million in adjusted EBIT in the third quarter, with a related margin of 19.2% on net revenue, an improvement of approximately 15 basis points over the prior period.
Fernando: Excluding our cloud investment of 18 million dollars this quarter, our third quarter adjusted EBITDA margin would have been approximately 22.2 percent.
Fernando: Moving to the balance sheet, we continue to focus on capital allocation to maintain a strong financial position.
Fernando: We reduced the balance of deferred acquisition consideration by approximately 72 million dollars down to 62 million from the end of the third quarter last year.
Fernando: We remain on track to reduce our DAC obligations to approximately 40 million dollars by the end of 24, excluding recently completed acquisitions.
Fernando: We also reduced NCI balances by approximately $7 million from the end of the third quarter of 2023 down to $23 million.
Fernando: These reductions to DAC and NCI will be accretive to net income and EPS in future periods.
Fernando: During the quarter, we acquired approximately 2 million shares at an average price of $6.60 per share for approximately $13 million. This brings our year-to-date repurchases to 13.8 million shares at an average price of $6.29 or approximately $87 million.
Fernando: Our buyback authorization as a quarter rent had approximately $52 million in remaining availability.
Fernando: As noted in our press release on November 7th, the board authorized an extension and a $125 million increase in the size of our previously approved stock repurchase program. As amended, we may now buy back up to an aggregate of $375 million in Class A common stock.
Fernando: CapEx and capitalized software for the quarter was $5 million, broadly in line with our targets.
Fernando: Cash flows from operations for the nine months year-to-date improved by 58 million dollars relative to the same period a year ago, driven principally by improvements in our working capital management.
Fernando: And year to date, we accelerated our M&A activity relative to last year. Through the first three quarters of twenty-four, we completed seven acquisitions versus two last year.
Fernando: We acquired approximately six times as much revenue in the current year while simultaneously deploying a comparatively smaller four times as much cash as we continue to make accretive acquisitions that produce strong returns.
Fernando: We continue to evaluate our portfolio and also explore potential dispositions.
Fernando: As a result, we ended the quarter with $146 million in cash and drawings under our revolver of $375 million, resulting in a leverage ratio of 3.5 times.
Fernando: And finally, we are affirming our full year 2024 guidance as follows. Organic net revenue growth is expected to be between 5 to 7 percent. Organic net revenue excluding advocacy growth is expected to be 4 to 5 percent.
Fernando: Adjusted EBITDA is expected to be between $400 million to $450 million.
Fernando: We expect to deliver approximately 50% free cash flow conversion and adjusted earnings per share is expected to be between 75 cents and 88 cents.
Fernando: 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.
Speaker Change: Thanks, Frank. Just a reminder, if you have any questions, please do submit them via the chat button at the top of the screen.
Speaker Change: Lots of questions today about digital transformation, and so we'll kick it off with a question from Steve Cahill over at Wells Fargo. DT improved nicely in the quarter. Can you help maybe to unpack some of the improvement there? And do you view this as kind of a sustainable inflection point moving forward?
Speaker Change: I do view it as a sustainable inflection point, because I think, as I've been saying, AI was coming, and the work that people needed to do in AI was coming, and I think what we're seeing is that it's beginning to arrive. I think it's arriving really first at the many tech clients.
Fernando: who are clients of ours who have to build the interfaces to make
Fernando: to make AI accessible to consumers. And then I think that's gonna spread to the clients who then have to make their own individual websites and contact points.
accessible through AR.
Fernando: So as I've said, I think there's many years of digital transformation to come here. We went from that year of efficiency to what I said was going to be the year of competition. And I said that, look, they build the chips, they have the clouds, and then they're going to get to the applications. And I think that now they're getting to the applications.
So, um
Fernando: A lot of other questions about SMT, which obviously had some really nice growth in the quarter as well.
Speaker Change: A question here from Jason Cryer at Craig Hallam. It goes, SMC is seeing consistent acceleration across 2024. Can you maybe talk a little bit about what some of the key solutions resonating with clients today are? And what may be some of the levers that we might have to sort of drive greater monetization across the SMC suite over the coming years?
Speaker Change: Well, I think that we're seeing, you know, pick up on some of the advanced media platforms.
I think we saw some increase.
and kind of advertising on some of the screens.
Speaker Change: We've seen really kind of, you know, I highlighted what we saw in terms of around our product because you can see big name sponsors are now coming on.
Speaker Change: So it's a combination of big teams, big sponsors, new experiences.
Speaker Change: I think that we're still in the nascent phase of that, that the initial sponsors are getting a really positive feedback from the experiences and that that can grow over the next couple of years into a very significant business. We appear to be ahead of the curve.
Speaker Change: in terms of other technologies that are out there that produce that kind of augmented reality experience.
Speaker Change: I think that we're particularly enthusiastic about the Barrow product. It's a truly sophisticated, not just brand tracking tool, but a brand modeling and economic analysis tool that CMOs can use to answer the question that CEOs always ask, why should I spend any money on this?
Speaker Change: and I think it is an incredible suite of tools and we've already seen, you know, pick up across the major payments company. We've seen people really want to sign on for a long period. It's getting that, it's getting a really positive feedback, you know, over the long run.
Speaker Change: We're going to have communications products, and those have been bolstered by the particularly the leaders platform It's an influencer platform that we're seeing also has good pick-up clothing here
Speaker Change: are research products with Quest and Vera and the brand Terminal that are already in 150 clients.
Speaker Change: And our WonderCave platform also is a remarkably efficient platform for delivering targeted text message marketing.
Speaker Change: We also believe that we're ahead of the curve here. We also have the experience of developing it through the political season, which means that we have so much more experience.
Speaker Change: targeting through text messaging virtually any platform out there because there's billions of messages and the data that has been able to build up through those messages.
Speaker Change: So I think the Sparrow Cloud is a really exciting place.
I think it's one of the unique features.
Speaker Change: that makes us a challenger marketing company that the big ones really don't have this kind of incubation of tech products across these different areas and the ability to develop them and implement them as quickly as we are. And I think you're seeing promise. I hope that answers your question. I'm most looking to follow up on this.
Thank you for joining us. Thank you.
Speaker Change: And maybe just riffing off that a little bit, Laura Martin of Ritneedum, she'd asked some questions about Gen AI.
Speaker Change: road map. And then she kind of goes, and this is a question a lot of investors have, over the next three years, say, do you think that Gen I innovations will lower cost more or drive revenue upside? I think for us there's no question that it will drive revenue.
Speaker Change: that because we're not just in the business of delivering marketing, but in the business of delivering digital transformation,
Thank you.
companies, and consumers.
Speaker Change: I think you saw Elon Musk unveil robots, there will be home touch, there will be various ways that brands now communicate through large language models with consumers in new ways. And it opens up, I think,
Speaker Change: a whole new sphere of digital transformation. So that's why for us, I expect it to be a core revenue driver.
Speaker Change: I expect that obviously there are internal uses of AI, like better production, creating new images and storyboards, and making ads with less production money.
Speaker Change: It will still take the same creativity to make it, even more advanced creativity to make it, a differentiated head.
Speaker Change: It will primarily benefit the production process, which is 90% pass-through expenses for us anyway. So cost, so, and also lower cost of production will only generate more interesting, creative, high-level work. It's the same thing that I saw how the survey business...
Speaker Change: In terms of image production, I think it's going to be helpful, but it doesn't take revenue away. I think in the long run it does the opposite. It takes a lot of the real drudge work and a lot of the pass-through revenues away. But the real benefit for us...
Speaker Change: has been in the digital transformation areas where we help the companies market AI on the marketing side and most importantly, develop AI interfaces to consumers because that's the way brands are really going to move their image.
Um
Speaker Change: Question from Mark Zagotto, Chair for Benchmark. This is looking at government services, something we've kind of talked about that over time, and obviously consuling.
Speaker Change: acquisition which has a significant government portion as well. Can you maybe talk about how you're viewing the vision for that part of the business maybe over the next three to five years? Sure. I think that about 10 to 15 percent of our business should be government related. I think because of the history of a lot of our firms were originally smaller firms or were not part of a larger unit, they really didn't go after government business.
in the last two months.
Speaker Change: Over at Code & Theory, they have developed a government services unit. We're developing one for all of the marketing services.
we're beginning to
Speaker Change: of the complicated proposals. I want that to go from the zero it is now to the 10 or 15 percent of our business that it can be. But do I see that as a six-month process? No. Realistically, it's going to take two or three years to win a couple of major ones. But we are really well-positioned.
Speaker Change: to gain that kind of work. And we now have the kind of infrastructure that the government will look for to get us awarded that kind of work.
Speaker Change: Let's change gears a little bit, talk a little bit about new business wins. And Jeff Van Cinder over at B Reilly, he's asked, can you speak just a little bit more about some of these recent wins?
Speaker Change: and a little bit about kind of revenue ramp from some of those ones as well. When we expect to see some of those start flowing through. Is this a 2025 thing? A second half of this year? How are we looking at that?
Speaker Change: Sure, I think some of the tech company ones remain undisclosed. I think you've seen us announce major wins with Adobe, major wins with GM, in terms of both Chevy.
Speaker Change: Cadillac, I think it's seen a pretty good win in Ferraro. I think that those, you know, the Adobe stuff really comes on in December, and some of the GMs started.
Speaker Change: in the kind of second half of the third quarter. All of these things will, I think, come through full year in the next year. And I expect that these wins will all be started before the end of the year.
Speaker Change: And as I say, we have a surprising number of $10 to $20 million pitches out that we're waiting on decisions on that would start next year.
Speaker Change: Good stuff. I think, kind of playing off that a little bit, Cameron McVeigh has asked, when you think of a given CMO, how have their priorities shifted, if at all? Like, what seems to be that most important capability to win new business currently for the stack?
Speaker Change: I think that number one, I think more CMOs are interested in us as the challenger.
Speaker Change: Our visibility, you know, as an alternative coming out of CAN with our team, and I recently was a keynote speaker at the ANA to a couple thousand marketers. Just in general, I think our visibility and establishment is an incredible alternative.
Speaker Change: to the top majors has really come up significantly and I can see that in the in the pitch flow that we're getting.
Speaker Change: In terms of an individual CMO, you know, it will vary by industry, by product, is it a luxury industry, a car industry?
Is there a more creative?
Speaker Change: Interested CMO? Is it a more performance marketing one? I don't think there's any single silver bullet there.
What I can say is that
Speaker Change: If you look at RFPs and how businesses solicit it, I think people look at marketing services, which is creative, content, research.
Speaker Change: and all of those things, and we are really well skilled and we have it.
Speaker Change: Really incredible, creative names of the top 72 on Sunday, Amelie.
sportsman, donor.
All of them are incredible, award-winning groups.
backed by award-winning research, now backed by...
And I think the second path...
Speaker Change: It is media. The CMOs put out quite separately media and data RFPs, and that's where Assembly and Gale are both.
Speaker Change: And again, as we scale those up, we go to bigger clients across more countries. And then the third is digital transformation. My goal is for transformation companies to scale that up. So what we're showing across these three verticals is increased scale, award-winning professionalism.
Speaker Change: and a mix of creativity and digital talent that can both design and build these experiences.
Speaker Change: Just a reminder, any final questions, please do throw them into the chat. I think just the last one to kind of key in on a little bit here. Well, maybe two more, but first of all, and I want to make sure we're obviously not putting out forward guidance.
Speaker Change: today. I want to make sure everyone is aware of that. But one of the questions we've got is about maybe the growth algorithm moving forward as we look into the end of 2024 and then over the course of the next few years. As you think about the growth drivers and the growth algorithms, Stagwell,
Speaker Change: What does that look like? Well, we've always said that the most important thing for our growth is the health digital transformation
Speaker Change: Chris, that should be the highest gross service, and I think we went through a period here with the year of efficiency and tech pullbacks, which is over.
and how I think we're getting back to that.
Speaker Change: We're seeing very nice growth in the creative services, which some people would think is a surprise, but I think it's some of the majors have moved out of creative. In fact, our creative services have become more valuable.
Speaker Change: I think media is a kind of a constant, you know, growth area for us that, you know, we're going to add significant data and other resources to that.
to be increasingly competitive in bigger pitches.
and obviously the Stadler Marketing Cloud over the long run.
Speaker Change: should go with digital transformation and achieve very high growth rates once I think all the products are developed. So I don't know if I fully answered, but our growth algorithm was always that the digital services would grow at a faster rate.
Speaker Change: kind of the creative services would grow at kind of lower single-digit rates and kind of research media somewhere in between.
Speaker Change: Good stuff. I think that brings us to the end of our of the questions for today and to the end of the third quarter call. Thank you so much for everyone for joining us and we look forward to welcoming you for the Q4 call in the new year.