Stagwell Inc. Q2 FY2026 earnings call

Core Financial Performance

• This was the largest Q2 in Stagwell's history, with 10% YoY organic revenue growth and 5% YoY organic net revenue growth, the strongest growth in the last six quarters.
• Total revenue grew 11% YoY to $786 million; total net revenue grew 6% YoY to $632 million.
• Adjusted EBITDA grew 15% YoY to $108.7 million, with margin expanding 143 basis points to 17.2%. Adjusted EPS grew 39% YoY to $0.25.
• Net new business of $171 million was the highest in company history, 45% higher than Q2 2025, led by major new client assignments.

New Business Wins

• Stagwell won high-profile accounts from legacy incumbents, including IBM's creative business, Visit California (which had not changed providers in over 20 years), Hershey, Mondelez, Heineken, and Navy Federal Credit Union.
• The firm expanded its relationship with Adobe and acquired Q Strauss Consulting, a leading Adobe implementation firm based in Colombia.
• Year-end cumulative pipeline is expected to be ~30% higher than 2025, the strongest pipeline in company history.

AI and Product Development

• Stagwell positions itself as a leader in agentic AI marketing, with a growing full suite of agentic enterprise AI products including the Machine, Knowledge Machine, Targeting Machine, and Media Machine.
• Through H1 2026, the firm hit $16 million in committed enterprise technology revenue, with an additional $16 million in pipeline, on track to exceed the full-year 2026 bookings target of $25 million.
• AI has improved internal efficiency: ~75% of coding for client projects is now done agentically, reducing labor input and improving margins.

Operational Efficiency and Cost Management

• Since launching the cost reduction program in April 2025, the company has achieved ~$70 million in annualized savings, on track to hit the full-year target of $80 million to $100 million.
• Staff costs as a percentage of net revenue declined 280 basis points YoY to 60.9%, the lowest Q2 labor ratio in four years. Trailing 12-month revenue per employee exceeded $280,000, up 6% YoY, the highest level in the marketing services industry.
• Back-office automation is on track to deliver over 25,000 hours of monthly productivity gains.

Cash Flow and Capital Structure

• H1 2026 operating cash flow was $63.7 million, up 16% YoY.
• Net leverage stood at 3.04x at quarter-end, on track to exit 2026 with net leverage in the mid-2x range.
• In Q2, the company repurchased 5.9 million shares for ~$36.7 million at an average price of $6.22 per share. Year-to-date, 14.4 million shares have been repurchased for $88 million, reducing outstanding shares by 6.4% YoY.

All five operating segments delivered organic revenue and net revenue growth in Q2 2026:

1. Digital Transformation: 18% YoY organic net revenue growth, reaching $107 million in net revenue. It contributed 17% of total net revenue, and delivered a 30% adjusted EBITDA margin, the highest since the company's merger.
2. Communications: 12% YoY organic net revenue growth, reaching $112 million in net revenue. It contributed 18% of total net revenue, marking the segment's strongest Q2 since the merger.
3. Marketing Cloud: 4% YoY organic net revenue growth, reaching $27 million in net revenue, contributing 4% of total net revenue. Growth was driven by demand for AI-embedded products, high platform utilization, and new subscription offerings.
4. Marketing Services: 0.5% YoY organic net revenue growth, reaching $243 million in net revenue, contributing 38% of total net revenue. Multiple large creative assignments won in Q2 are expected to scale in H2 2026 and position the segment for stronger growth in 2027.
5. Media and Commerce: 1% YoY organic net revenue growth, reaching $155 million in net revenue, contributing 25% of total net revenue.

Geographically, the U.S. (Stagwell's largest region) delivered 7.1% YoY organic net revenue growth, while the U.K. (second-largest region) delivered 13.4% YoY organic net revenue growth.

• Full-year 2026 total net revenue growth guidance is maintained at 8% to 12% YoY, with growth expected to be overwhelmingly organic.
• Full-year 2026 adjusted EBITDA guidance is maintained at $475 million to $525 million.
• Full-year 2026 free cash flow conversion guidance is maintained at 50% to 60% of adjusted EBITDA.
• Full-year 2026 adjusted EPS guidance was raised to $1.03 to $1.17 per share, up from the prior $1.00 to $1.03 range, reflecting year-to-date share repurchase activity; additional share buybacks could create further upside to EPS guidance later in the year.
• Full-year 2026 capital expenditure and capitalized software investment is expected to be in line with 2025 levels.
• Management expects double-digit organic net revenue growth in H2 2026, led by the Digital Transformation and Communications segments.
• Management expects the strong new business trend to drive solid adjusted EBITDA growth in 2027, followed by excellent growth in 2028 driven by the U.S. presidential election cycle.

No explicit material risks or operational failures were discussed during the call. Management only noted that forward-looking statements are subject to general uncertainties disclosed in the company's SEC filings.

Q: What is driving the strong sustained growth of the Digital Transformation segment, and is this growth sustainable into H2 2026 and 2027? / A: Growth is driven by widespread enterprise demand to update consumer-facing marketing operations for AI, a shift that management expects to create a multi-decade backlog of high-value work. Stagwell's focus on high-margin, end-to-end AI transformation work (rather than commoditized IT services) and strategic partnerships with Adobe and Palantir have strengthened its competitive position. AI automation has also improved internal efficiency, with 75% of coding now done agentically, supporting continued margin expansion. This growth trajectory is expected to be sustainable for the long term.

Q: Why is Stagwell outperforming peer agencies in new business win rates amid a reported tougher market environment, and what key client demands are you seeing? / A: The key differentiator is Stagwell's focus on premium human creativity augmented by AI, rather than replacing creativity with AI as many peers have done. This combination resonates with large brands that need differentiation in a crowded market. The firm has also expanded its pipeline in high-growth areas including government contracts and international markets, and restructured its U.K. operations to drive double-digit regional growth, leading to consistent wins against legacy incumbents.

Q: How is Stagwell using AI to grow revenue and reduce costs, and what is the current outlook for 2026 capital expenditures? / A: AI is infused across all internal and client-facing processes: client work is completed faster and more efficiently, and back-office operations have been automated to drive productivity gains and lower labor costs. For 2026, total capital expenditure and capitalized software investment is expected to stay in line with 2025 levels. The firm has shifted its capital allocation strategy from large acquisitions to internal CapEx for product development and share buybacks, which aligns with the current focus on organic growth.

Q: What is the outlook for capital allocation in H2 2026, particularly for M&A, buybacks, and debt paydown? / A: Capital allocation will remain balanced: the firm targets mid-2x net leverage by year-end, will continue to fund planned CapEx, will maintain an active share repurchase program to boost EPS, and will pursue a small number of small-to-mid-sized acquisitions. Acquisitions will focus on complementary capabilities that support Stagwell's full-service vision and expand its owned media properties, with no large transformative deals expected in the near term. 2026 growth will be overwhelmingly organic, with fewer acquisitions than originally planned earlier in the year.