斯塔格威尔 (STGW) 2026年第三季度业绩电话会议：AI增长推动EBITDA创历史新高

Stagwell (NASDAQ: STGW) 公布了创纪录的 2026 财年第三季度营收、净营收、调整后 EBITDA、调整后 EBITDA 利润率以及调整后每股收益（EPS）。随着该公司持续向基于人工智能（AI）的营销软件和转型服务转型，数字转型（Digital Transformation）、营销云（The Marketing Cloud）和通信（Communications）业务引领了业绩增长。

核心要点

• 营收同比增长 10% 至 8.16 亿美元，净营收增长 8% 至 6.64 亿美元。内生营收增长 11%，内生净营收增长超过 7%。
• 调整后 EBITDA 攀升 25% 至 1.448 亿美元。调整后 EBITDA 利润率扩大约 290 个基点，达到净营收 21.8% 的历史新高。
• 调整后每股收益增长 42% 至 0.34 美元，主要得益于调整后净利润的增长。
• 数字转型业务内生净营收增长 23% 至 1.19 亿美元；同时，受 Machine OS 相关软件销售加速推动，营销云业务内生净营收大增 108% 至 5600 万美元。
• Stagwell 上调了全年调整后 EBITDA 指引至 4.90 亿-5.40 亿美元，并将调整后每股收益指引上调至 1.07-1.21 美元。公司维持总净营收增长 8%-12% 以及自由现金流转化率 50%-60% 的指引不变。
• 年初至今的企业技术预订额达到 5900 万美元。管理层将其最初设定的 2027 年企业技术预订额目标翻倍至 1.5 亿美元。

核心财务数据

业务与运营表现

AI 软件与数字转型引领增长

数字转型业务实现净营收 1.19 亿美元，内生增长 23%。技术实施、系统集成和工作流优化（包括与 Machine OS 相关的能力）推动了需求增长。由于营收增速超过招聘和其他员工成本的增速，该板块的调整后 EBITDA 利润率达到 32.1%。

营销云业务实现净营收 5600 万美元，内生增长 108%。管理层将这一增长主要归因于与 Machines 产品套件相关的软件销售以及对研究产品的强劲需求。受益于更高的软件贡献占比，其调整后 EBITDA 利润率达到 44.3%。

Stagwell 推出了 Stagwell AI，作为其智能体（agentic）产品和服务的统一平台。其产品套件包括 Machine OS、Knowledge Machine、Targeting Machine、Media Machine 和 Insight Machine。

公司还扩大了与 Palantir 的合作关系，成为其“首选营销转型合作伙伴”，并建立了联合市场拓展安排。管理层表示，与 Palantir、ServiceNow 和 Adobe 的合作旨在加速企业分销与产品开发。

通信业务得益于政治与倡议活动

受企业通信、公共事务以及美国中期选举相关活动的支撑，通信业务内生净营收增长 20% 至 1.24 亿美元。与 2024 年相比，Stagwell 的政治业务正朝着低单位数增长的方向发展，好于此前平盘的预期。

管理层预计公共倡议活动将保持健康，并表示总统大选周期应从 2027 年中期开始带来更显著的贡献。

营销服务业务持续承压

营销服务净营收下降 9% 至 2.18 亿美元，其中包括 7.5% 的内生下滑。管理层提到了去年同期的高基数对比以及新客户项目爬坡的时间差。公司在第二和第三季度获得了多项重大合约，预计这些新获项目将支撑 2027 年恢复增长。

媒体业务表现受中东局势影响

媒体与商务（Media & Commerce）内生净营收下降 2% 至 1.59 亿美元。自有媒体和 CRM 的增长被持续冲突导致的中东地区支出下降所抵消。

Stagwell 预计该板块将于 2027 年初恢复增长。公司还在季度结束后推出了 Stagwell Media，并收购了 Freestar，新增了一个为 1000 多个网站提供服务的技术驱动型广告运营平台。

美国市场的增长抵消了部分地区的疲软

美国内生净营收增加 5300 万美元（即 11%），拉丁美洲在较低基数上增长了 54%。中东地区内生净营收减少 900 万美元（即 35%），给公司层面的内生增长带来了约 2 个百分点的阻力。

成本控制助力利润率扩大

截至季末，Stagwell 已执行了此前宣布的 7800 万美元节约计划，并有望在年底前实现 8000 万-1 亿美元的节约目标。员工成本占净营收的比例下降了约 400 个基点，降至 57.6%。

管理层表示，内部技术和 AI 举措已产生了约 4800 万美元的节约。公司还计划在财务和人力资源等部门全面推广 ServiceNow 的 Control Tower 平台。

管理层业绩指引

调整后 EBITDA 和调整后每股收益的范围均有所上调，而总净营收增长和自由现金流转化率的指引则予以维持。该展望假设第四季度内生增长将持续加速，利润率将扩大，并且并购将带来贡献。

管理层预计 Stagwell 在走出 2026 年时，净杠杆率将在 2.5x 左右。对于 2027 年，出于需求加速和数字转型项目储备强劲的考虑，公司将其最初的企业技术预订额目标翻倍至 1.5 亿美元。

风险与核心关注事项

• 中东冲突使该地区的内生净营收减少了 900 万美元，项目暂停和旅游相关支出减少对业绩造成了不利影响。
• 营销服务业务继续面临基数偏高、新项目进度推迟，以及首席营销官与创意合约变动频繁等不利因素。
• 实现 50%-60% 的自由现金流转化率目标，部分取决于第四季度正常的营运资金季节性规律以及中期选举周期的尾声。
• Stagwell 计划扩大其技术销售团队以支持更高的预订目标，尽管管理层预计软件盈利能力将保持强劲，但这仍将带来额外的投资需求。
• 媒体与商务以及营销服务业务必须将近期获得的新项目转化为营收，以实现管理层预期的 2027 年恢复增长的目标。

分析师问答精选

技术业务利润率与增长：管理层表示，营销云（The Marketing Cloud）的利润率水平至少是公司整体服务业务的两倍。尽管计划对销售能力进行投资，但预计随着时间的推移，盈利能力将保持稳定或有所改善。

企业客户经济效益：Mark Penn 表示，一个完整的营销转型项目通常意味着 2000 万-4000 万美元的业务规模，并具备定期的长期营收潜力。根据他以往的运营经验，他估计大型客户通过使用 Stagwell 的系统每年可节省约 1 亿美元或更多资金。

数字转型前景：管理层预计强劲的发展势头仍将持续，理由是 Code and Theory 迎来了其历史上最大的项目储备，并且围绕 AI 重新设计面向客户的技术的需求也在持续增长。

政府业务机遇：Stagwell 作为 CACI 的分包商赢得了首个重要的联邦项目，为美国中央司令部（U.S. Central Command）提供服务。五年期的合同总金额达 15 亿美元，管理层保守预计 Stagwell 将斩获 10% 的服务费分账，相关工作将于 2027 年开始放量。公司还赢得了第二个重大的联邦项目，并认为政府相关业务最终可能占其总业务量的至少 10%。

资本配置：Stagwell 已恢复执行股票回购、并购和降低杠杆率的综合组合策略。本季度公司回购了约 26 万股股票，年初至今按 6.23 美元的均价累计回购了 1210 万股。

业绩电话会议完整文字记录

完整财报电话会议逐字稿

管理层陈述

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.