스태그웰(STGW) 2026년 3분기 실적 발표회: AI 성장에 힘입어 사상 최대 EBITDA 기록

스태그웰(NASDAQ: STGW)은 2026년 3분기 매출, 순매출, 조정 EBITDA, 조정 EBITDA 마진 및 조정 EPS 모두 역대 최고치를 기록했다고 발표했습니다. 회사가 AI 기반 마케팅 소프트웨어 및 전환 서비스로의 전환을 지속함에 따라 디지털 트랜스포메이션(Digital Transformation), 더 마케팅 클라우드(The Marketing Cloud), 커뮤니케이션(Communications) 부문이 성장을 이끌었습니다.

핵심 요약

• 매출은 전년 동기 대비 10% 증가한 8억 1,600만 달러를 기록했고, 순매출은 8% 증가한 6억 6,400만 달러를 기록했습니다. 자체 매출 성장률은 11%를 기록했으며, 자체 순매출은 7% 이상 증가했습니다.
• 조정 EBITDA는 25% 증가한 1억 4,480만 달러를 기록했습니다. 조정 EBITDA 마진은 약 290bp 확장되어 순매출 대비 역대 최고치인 21.8%를 기록했습니다.
• 조정 EPS는 주로 조정 순이익 증가에 힘입어 42% 상승한 0.34달러를 기록했습니다.
• 머신 OS(Machine OS) 관련 소프트웨어 판매가 가속화되면서 디지털 트랜스포메이션의 자체 순매출은 23% 증가한 1억 1,900만 달러를 기록했고, 더 마케팅 클라우드는 108% 증가한 5,600만 달러를 기록했습니다.
• 스태그웰은 연간 조정 EBITDA 가이던스를 4억 9,000만~5억 4,000만 달러로, 조정 EPS 가이던스를 1.07~1.21달러로 상향 조정했습니다. 전체 순매출 성장률 가이던스 8%~12%와 잉여현금흐름 전환율 50%~60%는 기존대로 유지했습니다.
• 연초 대비 누적 엔터프라이즈 기술 수주액은 5,900만 달러에 달했습니다. 경영진은 2027년 엔터프라이즈 기술 수주 목표를 당초 계획의 두 배인 1억 5,000만 달러로 늘렸습니다.

핵심 재무 데이터

사업 및 영업 실적

AI 소프트웨어 및 디지털 트랜스포메이션이 성장을 견인

디지털 트랜스포메이션 부문은 자체 기준 23% 증가한 1억 1,900만 달러의 순매출을 올렸습니다. 머신 OS(Machine OS) 관련 기능을 포함한 기술 구현, 통합 및 워크플로 최적화가 수요를 견인했습니다. 매출 증가율이 채용 및 기타 인건비 증가율을 상회하면서 이 부문은 32.1%의 조정 EBITDA 마진을 기록했습니다.

더 마케팅 클라우드는 자체 기준 108% 증가한 5,600만 달러의 순매출을 달성했습니다. 경영진은 이러한 증가가 주로 머신 제품군과 연계된 소프트웨어 매출 및 리서치 제품에 대한 수요 강세에 기인한 것이라고 밝혔습니다. 높은 소프트웨어 기여도를 반영하여 조정 EBITDA 마진은 44.3%에 달했습니다.

스태그웰은 에이전트 제품 및 서비스를 위한 통합 플랫폼으로 스태그웰 AI(Stagwell AI)를 출시했습니다. 제품군에는 머신 OS, 노리지 머신(Knowledge Machine), 타겟팅 머신(Targeting Machine), 미디어 머신(Media Machine), 인사이트 머신(Insight Machine)이 포함됩니다.

회사는 또한 팔란티어(Palantir)와의 관계를 확장하여 프리미어 마케팅 트랜스포메이션 파트너가 되었으며 공동 시장 진출 협약을 체결했습니다. 경영진은 팔란티어, 서비스나우(ServiceNow), 어도비(Adobe)와의 파트너십이 엔터프라이즈 유통 및 제품 개발을 가속화하기 위한 것이라고 설명했습니다.

정치 및 옹호 활동 수혜를 입은 커뮤니케이션 부문

커뮤니케이션 부문의 자체 순매출은 기업 커뮤니케이션, 공공 정책(Public affairs) 및 미국 중간선거 관련 활동에 힘입어 20% 증가한 1억 2,400만 달러를 기록했습니다. 스태그웰의 정치 관련 사업은 보합세를 나타낼 것이라던 이전 전망을 상회하며 2024년 대비 한 자릿수 초반의 성장세를 보이고 있습니다.

경영진은 옹호 활동이 견조하게 유지될 것으로 예상하며, 대선 주기가 2027년 중반부터 보다 의미 있게 기여하기 시작할 것이라고 밝혔습니다.

여전히 압박을 받고 있는 마케팅 서비스 부문

마케팅 서비스 순매출은 자체 기준 7.5% 감소를 포함해 9% 감소한 2억 1,800만 달러를 기록했습니다. 경영진은 기저효과에 따른 부담과 신규 고객 계약의 가동 시점을 이유로 들었습니다. 2분기와 3분기에 수주한 다수의 주요 계약을 바탕으로, 회사는 2027년에 성장세로 돌아설 것으로 기대하고 있습니다.

중동 정세의 영향을 받은 미디어 실적

미디어 및 커머스 부문의 자체 순매출은 2% 감소한 1억 5,900만 달러를 기록했습니다. 자사 미디어(Owned media) 및 CRM의 성장은 진행 중인 분쟁과 관련된 중동 지역의 지출 감소로 상쇄되었습니다.

스태그웰은 해당 부문이 2027년 초에 성장세로 돌아설 것으로 예상하고 있습니다. 회사는 또한 분기 말 이후 스태그웰 미디어(Stagwell Media)를 출시하고 프리스타(Freestar)를 인수해 1,000개 이상의 웹사이트에 서비스를 제공하는 기술 기반 광고 운영 플랫폼을 추가했습니다.

지역적 약세를 상쇄한 미국의 성장

미국의 자체 순매출은 5,300만 달러(11%) 증가했으며, 중남미는 적은 기반에서 54% 성장했습니다. 반면 중동의 자체 순매출은 900만 달러(35%) 감소하여 회사 전체 기준 약 2%포인트의 자체 성장률 역풍을 초래했습니다.

마진 확대를 뒷받침하는 비용 통제

스태그웰은 분기 말까지 이전에 발표한 절감액 중 7,800만 달러를 실행했으며, 연말까지 8,000만~1억 달러 절감 목표를 순조롭게 달성하고 있습니다. 인건비 비중은 순매출의 57.6%로 약 400bp 감소했습니다.

경영진은 내부 기술 및 AI 이니셔티브를 통해 약 4,800만 달러의 비용 절감을 달성했다고 밝혔습니다. 회사는 또한 재무 및 인사 등을 포함한 주요 기능 전반에 서비스나우의 컨트롤 타워(Control Tower)를 구축할 계획입니다.

경영진 가이던스

조정 EBITDA와 조정 EPS 전망치 범위는 상향 조정된 반면, 전체 순매출 성장률과 잉여현금흐름 전환율 가이던스는 재확인되었습니다. 이번 전망은 4분기에도 자체 매출 성장이 지속적으로 가속화되고, 마진이 확대되며, 인수합병 기여가 이어질 것을 전제로 합니다.

경영진은 스태그웰이 2026년 말 순레버리지 2배대 중반으로 한 해를 마감할 것으로 예상합니다. 2027년의 경우, 회사는 가속화되는 수요와 견조한 디지털 트랜스포메이션 파이프라인을 이유로 초기 엔터프라이즈 기술 수주 목표를 두 배인 1억 5,000만 달러로 상향했습니다.

리스크 및 주요 관전 포인트

• 중동 분쟁으로 인해 중동 지역의 자체 순매출이 900만 달러 감소했으며, 작업 중단과 관광 관련 지출 감소가 실적에 영향을 미쳤습니다.
• 마케팅 서비스 부문은 기저효과의 부담, 고객 계약 가동 지연, 최고마케팅책임자(CMO) 및 크리에이티브 계정의 전반적인 이탈에 계속 직면해 있습니다.
• 50%~60%의 잉여현금흐름 전환율 목표 달성은 4분기의 일반적인 운전자본 계절성과 중간선거 주기의 마무리에 부분적으로 의존합니다.
• 스태그웰은 상향된 수주 목표를 지원하기 위해 기술 영업 팀을 확장할 계획이며, 이는 경영진이 소프트웨어 수익성이 견조하게 유지될 것으로 기대함에도 불구하고 추가적인 투자 요인을 창출합니다.
• 미디어 및 커머스, 마케팅 서비스 부문은 2027년 경영진이 기대하는 성장세 전환을 달성하기 위해 최근 수주 건들을 매출로 전환해야 합니다.

애널리스트 Q&A 하이라이트

기술 마진 및 성장: 경영진은 더 마케팅 클라우드의 마진율이 회사 전체 서비스 사업의 최소 두 배에 달한다고 밝혔습니다. 영업 역량에 대한 계획된 투자에도 불구하고 시간이 지나면서 수익성이 유지되거나 개선될 것으로 예상합니다.

엔터프라이즈 고객 수익성: 마크 펜은 전면적인 마케팅 트랜스포메이션 프로젝트가 일반적으로 반복적이고 장기적인 매출 잠재력을 가진 2,000만~4,000만 달러 규모의 프로젝트라고 말했습니다. 그는 자신의 과거 운영 경험을 바탕으로 대형 고객사가 스태그웰의 시스템을 사용함으로써 연간 약 1억 달러 이상을 절감할 수 있을 것으로 추정했습니다.

디지털 트랜스포메이션 전망: 경영진은 코드 앤 시어리(Code and Theory) 역사상 가장 큰 파이프라인과 AI를 중심으로 고객 접점 기술을 재설계하려는 수요 증가를 들며 강력한 모멘텀이 지속될 것으로 예상합니다.

정부 관련 기회: 스태그웰은 미국 중부사령부 작업과 관련해 CACI의 하도급업체로서 첫 번째 주요 연방 계약을 수주했습니다. 전체 계약 규모는 5년간 15억 달러이며, 경영진은 2027년부터 작업이 본격화됨에 따라 스태그웰이 보수적으로 10%의 수수료를 확보할 수 있을 것으로 예상합니다. 회사는 또한 두 번째 주요 연방 계약도 수주했으며, 궁극적으로 정부 관련 작업이 전체 사업의 최소 10%를 차지할 수 있을 것으로 믿고 있습니다.

자본 배분: 스태그웰은 자사주 매입, 인수합병, 레버리지 축소를 병행하여 재개했습니다. 해당 분기 동안 약 26만 주를 매입했고, 연초 대비 누적으로는 평균 가격 6.23달러에 1,210만 주를 매입했습니다.

실적 발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Ben Allanson

Good morning, and thank you for joining us for Stagwell's Third Quarter Earnings Webcast. I am 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.

Mark Penn

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 #1 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 2-year stack to 30%, our ninth consecutive quarter of 2-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 of 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 2.7x, a 0.7 turn improvement year-over-year. Then there's 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's driving our record new business streak? It's 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've said on these calls that we see government as a real opportunity for Stagwell. Over the last 2 years, we've 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 5 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're now establishing 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 to $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. Well, you get the point.

Just last week, we expanded our agreement with Palantir, strengthening the Stagwell Machines with Palantir's world-class data engineering working side-by-side with our team headed by Chief AI Officer, John Kahan, who headed data and analytics at both Microsoft and IBM. The agreement also named Stagwell as the 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. And we've noted this move "fills a growing gap for clients" at a time when marketers are demanding greater agility, integration and practical AI capabilities from their agency partners, and 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 9 months, we focused on buybacks and deferred M&A. We have now resumed the 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% to 12% total net revenue growth and free cash conversion of 50% to 60%, but we're raising our adjusted EBITDA and adjusted EPS guidance. We now expect adjusted EBITDA of $490 million to $540 million and adjusted EPS of $1.07 to $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 2 or 3x that of marketing service revenue. With double-digit growth in Digital Transformation and 30% to 40% growth of software sales each year for the next 2 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.

And with that, I would like to hand it over to Ryan, who will walk you through the third quarter financials in more detail.

Ryan Greene

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 7 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.

The Marketing Cloud increased organic net revenue 108% to $56 million, driven primarily by the growth in software sales associated with the machines and increased demand for research products. Communications delivered 20% organic net revenue growth to $124 million, driven by corporate communications, public affairs work and activities associated with the U.S. midterm election cycle.

Our political business is on track for low single-digit growth versus 2024, ahead of our prior expectations for a flat performance. Media & Commerce declined 2% organically to $159 million. Growth in owned media and our CRM practice was offset by reduced spending in the Middle East related to the ongoing conflict. We expect this segment to return to growth early next year.

Marketing Services generated $218 million in net revenue, down 9% year-over-year, including a 7.5% reduction organically. This was largely attributable to the challenging prior year comps and timing related to new business wins. Several significant engagements were awarded in the second and third quarters, and we expect these wins to drive a return to growth in 2027.

Geographically, organic net revenue was led by the U.S., up $53 million or 11%. Latin America grew 54% from a smaller base. This was partially offset by a $9 million or 35% organic decline in the Middle East. As the top line accelerated, adjusted EBITDA increased $28.8 million or 25% year-over-year to a record $144.8 million. Adjusted EBITDA margin expanded approximately 290 basis points to a record 21.8% of net revenue. The margin improvement reflects a mix of organic growth, including higher-margin software, digital transformation and advocacy work, together with active management of labor.

Digital Transformation adjusted EBITDA margin was 32.1% in the third quarter. The segment benefits from higher-value workflow transformation engagements, while hiring and other staff cost growth trailed revenue growth in AI-enabled development and coding workflows, improving productivity.

The Marketing Cloud generated a 44.3% adjusted EBITDA margin in the quarter, reflecting the increased contribution from software sales associated with the Machine OS. Communications margin benefited from higher-value political services and disciplined staff costs. As a result, adjusted EPS increased 42% to a record $0.34, driven primarily by higher adjusted net income.

We continue to make progress on previously announced cost savings targets. $78 million of the savings have been actioned, keeping us on track to deliver the $80 million to $100 million year-end goal. We are taking steps to drive efficiency using technology, and we'll soon start implementing ServiceNow's Control Tower across business functions, including finance and HR.

Staff costs as a percentage of net revenue declined approximately 400 basis points year-over-year to 57.6%, the second lowest level since our merger and only 10 basis points above the 57.5% low in the fourth quarter of 2024. Across the cost base, productivity gains and active management of labor are allowing us to expand margins while continuing to invest selectively in growth initiatives. Year-to-date operating cash flow increased approximately $125 million or more than 400% to $155 million, driven by stronger working capital management, improvement in earnings and a one-time $3 million adjustment.

Year-to-date free cash flow increased by approximately $93 million year-over-year to $52 million. We expect further improvement in the fourth quarter, driven by normal seasonality and the culmination of the midterm election cycle. We remain confident in achieving our free cash flow conversion target of 50% to 60% of adjusted EBITDA.

At quarter end, deferred acquisition consideration was approximately $54 million, $13 million lower than a year ago. Our revolver balance was approximately $324 million with approximately $410 million of remaining availability under the credit agreement. Net leverage was 2.73x at quarter end, an improvement of 0.7 turns from 3.42x in the third quarter last year and 0.9 turns below the post-merger peak of 3.62% (sic) [ 3.62x ] in the third quarter of 2023. This was the second lowest quarterly net leverage ratio and our lowest third quarter ratio. We remain on track to exit 2026 with a net leverage ratio in the mid-2s.

During the quarter, we repurchased approximately 260,000 shares, bringing our year-to-date repurchase of approximately 12.1 million shares at an average share price of $6.23 per share. We ended the quarter with approximately 244.6 million shares outstanding and approximately $326 million remaining under our authorization. Year-to-date capital expenditures and capitalized software investments are in line with our expectations, and we expect full year capital expenditures and capitalized software investments to be in line with last year.

As Mark mentioned, we are updating our full year guidance today, raising adjusted EBITDA to $490 million to $540 million, raising adjusted EPS to $1.07 to $1.21 and reiterating 8% to 12% total net revenue growth and free cash flow conversion of 50% to 60%. This reflects our expectations for continued acceleration of organic growth in the fourth quarter, combined with margin expansion and contribution from M&A that Mark discussed.

Now I will hand it back over to Ben for questions.

Ben Allanson

Thank you, Ryan. [Operator Instructions] A lot of questions today, so I'm going to dive in here.

We're going to kick it off talking about mix shift. And the first question comes from David at Seaport. Obviously, strong new business trends continuing here and then the mix shift is towards technology, and it really feels like the tech products are contributing to a lot of these sales. Can you maybe discuss the expected ramp in tech over the coming quarters and the incremental margin profile associated with these products?

Mark Penn

Well, I had originally set a goal of $25 million of bookings for these tech enterprise products. We've hit $59 million. I originally set a goal next year of about $75 million. I doubled that to $150 million. I think the margin profile, as you can see, in The Marketing Cloud is, the margin profile is at least double the margin profile of the rest of our services. This is fundamentally more profitable revenue, even though we will now be adding the sales forces and sales teams in order to achieve those goals. I believe that profitability will be there or even improve over time beyond that.

Ben Allanson

Great. Related, Jason at Craig-Hallum. looking at the enterprise tech wins of that $59 million you referenced, including ServiceNow, is there any way to frame the upside opportunity that comes from layering in both AI and digital transformation capabilities on top of what's just a traditional media budget for a company like ServiceNow, for example?

Mark Penn

Well, look, I always analyze it this way. I explained and remember, I was basically co-CMO at Microsoft. So I had thousands of people, right? And so I understand a typical company has 10 divisions. It has 10 products. They have 10 SKUs, they market in 30 countries. So then effectively, they have 30,000 marketing cells, but they have to optimize. And so they'll often have 2,000 people, right, across the company and across the products to do that.

You implement software like this, and you probably can cut that in half, maybe better. And yet have a better system that can keep track of all 30,000 cells and put the decisions where the decisions should be made. That's where you could save $100 million or more. I know in a lot of the changes I made in 6 months, I saved $160 million, putting in systems that were similar to this, but not as advanced because we didn't have the capability.

Ben Allanson

Staying on Digital Transformation, I suspect. Jeff at B. Riley goes, can you just go into the outlook for digital transformation? Obviously, a really good quarter coming on the back of a good quarter in 2Q as well. Can you -- can Stagwell maintain that growth momentum in the segment?

Mark Penn

I think we're expecting to maintain that kind of strong growth in the segment because I think what's developed is really what I said about a year ago, I said, with the coming of AI, every single company is going to have to redo the way they interact with their customers. Sooner or later, they're going to get there to realizing that. And that later is now, okay? And I think what Code and Theory reports is the largest pipeline in their history.

So remember also that we tended to specialize in what I call the consumer touch part of technology, right? Those last mile technologies that every single company, I think, really has to rethink even if you look at the stagwell.ai website, and you see that it's agentically led by an agent. It's a radically new way. And every company -- look, any company that doesn't innovate and redo these things is going to be left behind. The cost of inaction here for companies is going to mount considerably.

Ben Allanson

Question from a number of people actually. Can you walk us through partnerships, including the Palantir one, which we announced last week? Can you explain how you think about partnerships and how they add strategic and execution positives for Stagwell?

Mark Penn

Well, just to give you an example, it's quite -- I think the ServiceNow partnership, ServiceNow has something called the Control Tower. The Control Tower agentically helps companies, including ours, run -- run HR, IT and CRM. We don't do those 3 things. We help companies redo their marketing department, their marketing units. So when you look at it, a company that's going to be agentically led can now put in the Control Tower and the Machines as a complete set of agentic marketing and business transformation.

So we think we can co-sell products like that. So in Palantir, we're building on top of the Foundry to create products that then go out to all their clients, and they're helping us display those products to the clients. So I think there's -- as we make this transformation, we're partnering with clients that have significant enterprise clients of their own already built, and we're filling a need here that we have particular expertise in. And that's why we can jump more quickly, I think, to get into market, and that's the goal of these partnerships.

Ben Allanson

Great. I want to just turn a little bit to a couple of the other segments. First question is around our Media business, and it's from Steve at Wells Fargo. He said Media has obviously lagged a little bit at Stagwell. Does it make sense for Stagwell to be in the business for the long term since it increasingly seems to favor scale, especially for some of the larger advertisers?

Mark Penn

Well, I think that's -- you really hit upon precisely why I think we've come out with Stagwell Media. What we said is, look, for those people who are really the broadest marketers for whom scale is really the biggest element, we know who they're going to likely choose. But today, there is a growing segment of performance-first marketers, which technology is really the advantage. And we have an advantage in the technology when you combine the machines and the targeting machine.

You look at the team that we're building headed by Slavi, we're building an amazing team of people. We're giving them an amazing set of technology tools, and we're going to compete for those clients for whom really technology and getting the right ad to the right person at the right time is really the most important element. And at the same time, we're also building owned media properties. So we'll be able to also give clients special access and special kinds of media treatments across now, when you look at Freestar, thousands of websites on the open web.

Ben Allanson

Maybe we could just go into that a little bit closer. Jason at Craig-Hallum had asked about the Freestar acquisition and ask for some more detail on our owned media strategy in general, the genesis of it. And he does sort of ask a question, which is fair is how will Stagwell look to mitigate any channel conflict to marketers within that business?

Mark Penn

Well, look, I think these things have to be structured as win-wins. And I think clients understand that they're getting special treatment, they're getting discounts. They're getting an access to a market where we have more control over getting really the right ad to the right person. And that should make for more effective media. So I don't think we're going to have a conflict. I think it's really going to result that this is going to be an attraction for clients to come in and say, "You know what, I want Stagwell Media. I want the Stagwell technology-first approach, and I'm going to kick the tires on some of these other properties you have." And if they fit within what we want, I think that's going to be a value-add for them.

Ben Allanson

Marketing Services lagged a little bit in the quarter. Adam at Goldman Sachs asked the question, a competitor reported this morning also highlighted some concerns in the creative segment at the moment. Could you maybe just discuss some of the dynamics we're seeing in creative? Is it a structural problem? Or is it something where it's just timing?

Mark Penn

Well, I think for us, we're continuing to win really high levels of creative accounts, but there's still a lot of shrinkage and movement and CMOs being fired. And so I do think there's a lot of turmoil in general. It is a great door for us. Again, our top agencies here are all up for Agency of the Year awards. So I think we're -- for us, there's a lot of these timing issues. We've won a lot of the new accounts because they're taking longer to, I think, get fully integrated and on track.

I do think that there's a lot of turnover in the creative industry. Our perspective is we continue to invest in premium creative. We think our headline agencies, if you look at the margin of them, they're doing quite well in terms of margin. No real issues there. I think they're going to hold up well. I think government contracts are going to come on. And remember, we lost $9 million out because of the Mid East because a lot of our work there was tourism-based.

Ben Allanson

A few more questions to go. sorry, there's a lot of them today. Let's give you a break and flip over to Ryan for a quick question. Alex, StoneX. He's asking about the fourth quarter working capital outlook and what's sort of the path to the upper half of that 50% to 60% conversion range.

Ryan Greene

Yes. I think it starts with our year-to-date performance. We've improved operating cash flow $125 million compared to last year. Free cash flow was $93 million better. And so if you compare that to last year, we have a seasonal business in terms of our working capital profile. The first 2 to 3 quarters, we use cash. We have our debt payments in February and August. But what we have been really benefiting from is increased work from our working capital, the increase in earnings and profitability of the company converting into cash, and then also the software sales and the pricing models behind them have also contributed meaningfully to our cash flow.

So if we layer that on top of our seasonality, where Q4 we get a lot of our cash, we see a real opportunity there.

Ben Allanson

Okay. Back to you, Mark. Laura, Needham, can you discuss the advocacy impact in the third quarter and kind of what you're thinking about in terms of outlook?

Mark Penn

I think as you see, the Communications segment is up 20%. Solid advocacy. It's actually running better than the last presidential race. We -- the last couple of days have been exceptionally good in terms of advocacy. And I think what's going to happen is that you're going to see another very significant, let's call it, 30% to 40% growth at least into the presidential race. And I think the presidential race will start mid 2027. But in the short term, it's a very healthy advocacy. People are involved. There's a tremendous amount of both fundraising and getting the vote out work here that we're doing.

Ben Allanson

Okay. Two more questions. Another one from Laura. Can you just update us on how AI, and this may be for both of you, on how AI is lowering costs in the business and also accelerating new product innovation and introduction?

Mark Penn

Well, I mean, I will say that we've saved internally, I think it's $48 million, right, as we put in kind of new tech systems for the -- not just in the back office, but for the management of content and workflow itself. And so we are finding significant savings internally. And at the same time, that's enabling us to put together the engineers and the sales force on the digital transformation and to basically go after significantly higher-margin revenue while at the same time keeping our overall labor expense among the lowest in our history.

Ben Allanson

Last question, and it relates to the illustrative model we put in our deck today, talking about potential valuation. It's an illustrative framework. A couple of questions relating to it and really the build here, how we're thinking about Digital Transformation from both a revenue growth and margin profile, 15% and 32% margin. The software products as well growing, I think we put 35% into that model. It aligns with what you said of 30% to 40% with, I think, a 45% margin is what we said there. And then the rest of the business growing healthy, solid little contribution as well within that, with I think we had a 17%, 18% margin there.

Can you maybe just talk particularly about the tech bit of that, The Marketing Cloud bit? How -- why you feel sort of -- I'm obviously confident it's obviously not guidance, but why you feel the way you do and you're excited about that bit of the business and really the potential for that as we look out 2 years in particular?

Mark Penn

Look, I sat on both sides, both being the client and in the agency, and I've sat in almost every single chair, right? And I see what these products can do. I see what we were trying to do for so many years that is now possible. Technology is not just about cutting costs. It's about doing the things you always want to do, but you never could do.

If you look at us, we have a complete suite of machines, the Machine OS, the Knowledge Machine, the Targeting Machine, the Media Machine and the Insight Machine. It's every single task now agentically powered that we've gotten ahead of the curve to develop and develop in a way that we're going to turn over to clients and CMOs so that they can run their marketing like never before. Am I enthusiastic about that? Absolutely. When you sit down and see our demo of our products, you will be too.

Ben Allanson

And one final bit on this. I think it's safe to say, we would say, sum of the parts is probably the way to start thinking about this business as we move forward. We're no longer really a Marketing Services business or something different.

Mark Penn

I think it was -- if you go back to the history of when I founded Stagwell, I always said that I understood that Marketing Services would be slower growth. We would start there, build up a reputation, a solid client base, and we would increasingly transition over to technology. I think we're able to seize the moment on AI with the right suite of engineers, products, knowledge and clients to make this transformation just at this time so we can continue to grow and succeed in Marketing Services, but really make the company into the tech-first marketing transformation company. Now that I think every company everywhere is going to have to redo not just the way it does IT and HR, but the way it does marketing. And we think we're a market leader in that answer.

Ben Allanson

A lot of questions today, but a big thanks to everyone who submitted one through the chat function. If we didn't get to you, I'm sorry about that. We'll be back in the new year for our fourth quarter call. We hope you all join us then.