Stagwell Inc Q2 FY2025 earnings call

• Strong second-quarter results with net revenue growing 8% and ex advocacy up 10%.
• Operating cash flow improved by $122 million.
• Achieved $117 million in net new business, fifth consecutive period over $100 million, trailing 12-month figure $451 million.
• AI initiatives: Investing $20M quarterly in OpEx, developing tools like media agents, influencer campaign bots, research dashboards, and content supply chain management system with Adobe.
• Key agencies performing strongly: 72andSunny grew 19% net revenue, NRG 13%, Assembly 7%, Kettle 41%.
• Digital transformation capability grew 12% ex advocacy with organic growth ex advocacy 7%.
• Cash flow from operations improved $122 million year-over-year, net leverage 3.18x, expecting year-end leverage in 2s.
• Acquired ADK GLOBAL and JetFuel, rebranded Marketing Cloud to The Marketing Cloud.

For the second quarter, Stagwell reported net revenue of $598 million, an 8% increase year-over-year. Excluding advocacy, total net revenue grew 10%. Digital transformation net revenue was $109 million, up 6% year-over-year and 12% excluding advocacy. The Marketing Cloud posted $66 million in net revenue, a 28% year-over-year increase, and 38% excluding advocacy. Creativity and Communications generated $264 million in net revenue, an 8% increase excluding advocacy. Consumer insights and strategy saw $51 million in net revenue, a 6% increase, led by 12% year-over-year growth from technology clients and over double growth in the financial sector. Performance Media and Data returned to growth with $108 million in net revenue, a 1% increase year-over-year.

• Total net revenue growth expected to be approximately 8%.
• Adjusted EBITDA expected between $410 million to $460 million.
• Expect to deliver in excess of 45% free cash flow conversion.
• Adjusted earnings per share expected between $0.75 per share and $0.88 per share.

Forward-looking statements are subject to uncertainties and risk factors addressed in the company's earnings release, slide presentation, and SEC filings.

Q: Talk about the acceleration in the back half of the year.

A: Mark Penn notes strong first-half growth, organic growth running 3 points ahead of last year, client churn in first half and advancement in second half due to holiday seasons, giving confidence in meeting metrics.

Q: Detail on improvement in cash flows and sustainability.

A: Ryan Greene mentions focus on working capital, deployment of back-office tech stack for real-time cash flow visibility, building back office center to chase invoices and renegotiate vendor terms, confident in sustainability due to holistic approach.

Q: Opportunity around marketing for AI-native companies and Stagwell's value add.

A: Mark Penn states Code and Theory Network is well-positioned, 5 of 6 clients are tech companies helping design AI experiences, AI up-levels business with more sophisticated ads and new services.

Q: Cost savings from the machine and tools.

A: Mark Penn says machine simplifies tasks, condenses labor stack, improves marketing efficiency in research, media, production, expects 15% cost reduction as systems roll out.

Q: Trajectory of net new business heading into second half.

A: Mark Penn notes net available pipeline keeps growing, $130M in Q1 was exceptional, pitch season heaviest in fall for new business.

Q: Opportunity in government and its impact.

A: Mark Penn says Stagwell is #2 listed U.S. marketing company, qualified for government contracts, several year contracts provide stability, margins comparable but larger size, will work with partners to win business.

Q: Media business strength and scaling.

A: Mark Penn says focus on technology spine, performance-oriented media buying, expects technology tools completed by end of year for major upgrade in media offering.

Q: M&A, global expansion, cost synergies.

A: Mark Jeffrey Penn says global expansion for revenue synergies, Ryan Greene mentions scaled costs and established hubs provide opportunities for better client service.

Q: Potential dispositions and Marketing Cloud spin-off.

A: Mark Penn says no dispositions slated for rest of year, Marketing Cloud development ongoing, will consider spin-off when products hit full value with double or more revenue.