Good morning and thank you for joining us for Stagwell's Second Quarter Earnings Webcast. I'm 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 Green, Stagwell's Chief Financial Officer. Mark will provide a business update before Ryan shares the financial review. 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 some additional resources. This morning's press release and slide deck provide definitions, explanations and reconciliations of non-GAAP financial data. And with that, I'd like to turn the call over to our Chairman and CEO, Mark Penn.
Thank you, Ben. When I founded Stagwell, I was convinced that the marketing services industry needed transformation. Stagwell was founded as a tech-forward challenger to the legacy players with the vision of providing customers with everything from global full service to platform self-service solutions. Stagwell's first half and especially the second quarter is validation of these founding principles and the work we have done to build Stagwell over the last decade and the incredible teams of people here who really make Stagwell what it is. AI is the tech transformation that we were built for and our business is thriving as we become recognized as the leader of cutting-edge agentic marketing. This was the biggest second quarter in the history of the company. Organic revenue grew 10% year-over-year and organic net revenue grew 5%. The standout was 18% organic net revenue growth in Digital Transformation, along with 12% from Communications.
Geographically, we saw 7% organic net revenue growth in the U.S. and 13% organic growth in the U.K. Adjusted EBITDA of $109 million is more than 15% higher than last year and the margin of 17.2% is 140 basis points higher. This improvement in profitability is a result of continued focus on cost management. Our labor ratio in the quarter stood at 61%, almost 300 basis point improvement year-over-year. Net new business of $171 million was our highest ever and 45% greater than 2Q '25, led by some major new assignments and adjusted EPS grew 39% year-over-year to $0.25. I said last quarter that 2026 is a pivotal year for Stagwell. These results show we are steadily moving ahead of the competition. Starting with net new business. The run of flagship wins clearly signifies us moving into a top 4 position in the industry when it comes to key capabilities. We continued our strength with tech companies by taking IBM's creative business away from a 30-plus year legacy incumbent.
We expanded our relationship with Adobe and added Colombia-based leading Adobe implementation firm QStrauss Consulting, consulting to the Code and Theory Network just earlier this week. We continue to grow our government work by winning Visit California, an account that hadn't turned over in over 20 years. We made inroads in the packaged food segment by winning mandates with both Hershey and Mondelez. We expanded our European presence joining Heineken's roster and winning both Haier Europe and Allwyn. And we celebrated wins with Navy Federal Credit Union, Allegiant Airlines and countless others. This new business momentum is a testament to the tech-forward collaborative approach Stagwell brings to its pitches and the great quality of its people. The feedback when we win these mandates is consistent. Stagwell is the right combination of strong creativity, great technology and agility. Our pipeline has never been stronger.
We expect cumulative year-end pipeline to be about 30% higher than last year. I've said Digital Transformation is going to be a major driver of our business this year. In 2Q, we saw organic net revenue growth of 18%, bringing our 2-year organic net revenue stack to more than 29%, a meaningful acceleration versus Q1 and the eighth consecutive quarter of improvement on that metric. This is all on top of Digital Transformation posting a 30% adjusted EBITDA margin in the second quarter. I'm regularly asked how our digital transformation businesses like Code and Theory have been able to generate mid-teens plus organic net revenue growth over the last 12 to 18 months, while the IT services and legacy holdco digital transformation businesses have declined or at best stayed flat, as well as how Stagwell is able to generate more than 3x the revenue per head of IT service players. The answer is simple.
The market is increasingly moving away from commoditized IT services with thousands of low-cost engineers towards higher value work that combines business strategy, technology creativity and AI transformation. This intersection is exactly where Stagwell's digital transformation agencies operate, powered by cutting-edge software and forward deployed specialists who realize value for clients by driving adoption and optimizing workflows. The results from the digital transformation speak for themselves. Our tech products are increasingly becoming core to our value proposition across all segments. Our solutions like The Machine and Stagwell Agentic Targeting System, or SATS, which is built on Palantir's Foundry, fit seamlessly into our customers' way of working. And we're doing the same with our media solutions, giving our customers more control and transparency over their media buy with The Media Machine and Stagwell Curate, all powered by AI.
We are closing in now on creating a complete suite of agentic products for enterprise, including The Machine, The Knowledge Machine, The Targeting Machine and The Media Machine. We're seeing real traction with products like The Machine and SATS. Through the first half of the year, we had $16 million of committed enterprise technology revenue and our pipeline exceeds another $16 million, firmly on track to exceed our initial bookings goal for this year of $25 million. We see this as part of the flywheel that will drive our new business momentum in the coming years. As we look towards the second half, I want to call out the growing momentum in our Communications segment, which saw 12% organic net revenue growth in the second quarter. This represents an almost 700 basis point quarter-over-quarter acceleration from the first quarter. Political is beginning to play an obvious part and will accelerate further as we get closer to the increasingly competitive midterm elections in November.
Our PR work continues to rebound strongly as well. We also continue to make strong progress on our initiatives to reduce small client churn, which will also have a positive impact on organic net revenue growth throughout the year. We anticipate an acceleration in the second half with double-digit net revenue growth led by Digital Transformation and Communications. The overwhelming majority of that growth will be organic. Our second quarter results are industry-leading and showing accelerating trends on all key metrics. Our new business successes over the last 12 months provide a strong foundation for the second half of the year. For that reason, we are updating our full year guidance today. As I've highlighted, we expect growth in the second half of the year to be overwhelmingly organic. We maintain our 8% to 12% total net revenue growth target and our adjusted EBITDA guidance of $475 million to $525 million.
We also reiterate our free cash conversion goal of 50% to 60% for the full year. However, we are raising our full year adjusted EPS guidance from $1.03 to $1.17 and this reflects our increasing confidence in the full year as well as the impact of year-to-date buyback activity. This is just the start of a multiyear growth cycle for Stagwell. As we look ahead to 2027 and 2028, our outstanding net new business trends provide increased visibility over the next 24 months plus. We're winning bigger, longer-term contracts with some of the most preeminent brands of the world and we continue to make headway on government contracts. We're winning these away from legacy competitors as clients look to help us help them adopt AI and new models of marketing. These wins will really make the full impact next year because it takes a while for them to come on board and ramp up as we continue our momentum throughout 2026.
And this is all before we really start the political super cycle of the midterm elections, presidential primaries and the largest election in American history in 2028. We are also carefully managing our costs throughout the business as we grow and expect our margins to continue expanding. This should mean solid growth in adjusted EBITDA in 2027 and then excellent growth in 2028 with the political season as well. At the same time, we continue to make progress on our free cash generation. With industry-leading growth, expanding margins and growing free cash flow, we do not believe that our current trading multiples are appropriate. To that end, we'll continue leveraging our buyback authorization to shrink our share count further, to have a positive compounding impact on our adjusted EPS growth. It could see us raise our already increased adjusted EPS guidance for the year later in the year.
The second quarter was excellent and it's just the start of a multiyear growth story for Stagwell. With that, I'd like to hand it over to Ryan, who will walk you through the financials in some more detail. Ryan?
Good morning. Thank you, Mark and thank you for joining us. I'm now going to provide some detail on our second quarter results and our progress against our full year objectives. This quarter reflects accelerating revenue growth and margin expansion while continuing to fund investments that will support our next phase of growth. We delivered 11% revenue growth to $786 million and 6% net revenue growth to $632 million. Second quarter organic revenue grew 10% and net revenue grew 5%, representing our strongest growth in the last 6 quarters. Organic contributions are expected to drive growth throughout the second half of 2026. Growth was broad-based across the portfolio, with all five operating segments delivering organic revenue and net revenue growth, led by Digital Transformation and Communications. Digital Transformation net revenue increased 18% organically year-over-year to $107 million.
Our teams are doing far more than system implementations. They are embedding teams alongside clients to drive meaningful business transformation. This is a premium service offering. And as a result, the segment delivered a 30% margin, its highest since the merger. Communications delivered 12% organic net revenue growth to $112 million, representing the segment's strongest second quarter since the merger. Corporate demand continues to grow as clients engage us to address critical communications and public affairs challenges. Our differentiated approach combines senior strategic talent and campaign-tested targeting capabilities that deliver results at both the national and local levels. We also expect election-related activity to contribute strongly to our second half results. The Marketing Cloud increased organic net revenue by 4% to $27 million. Growth was driven by demand for AI-embedded products, including 34% from LEADERS as well as high platform utilization and additional subscription-based offerings.
Marketing Services generated $243 million in net revenue, representing a 0.5% organic net revenue growth. Several significant creative assignments were awarded in the second quarter and are expected to scale throughout the second half of the year, positioning this segment for stronger growth in 2027. Media & Commerce grew 1% organically to $155 million in net revenue. Geographically, the U.S., our largest region, reported 7.1% organic net revenue growth year-over-year. The U.K., our second largest region, continued to accelerate, delivering 13.4% organic growth. As the top line accelerated, we also improved the efficiency of our business. Since launching our cost reduction program in April of 2025, we have actioned approximately $70 million of annualized savings and remain on track to achieve our year-end target of $80 million to $100 million. These actions are already contributing to margin expansion in 2026 and will be more fully reflected in 2027.
Technology investments are improving efficiency across the organization. Back-office automation initiatives are delivering results. The continued rollout of payroll, cash and expense automation platforms remain on track to generate more than 25,000 hours of monthly productivity efficiencies. Staff costs as a percent of net revenue declined 280 basis points year-over-year to 60.9%, our lowest second quarter labor ratio in four years. As a result, trailing 12-month revenue per head exceeded $280,000, up 6% from the second quarter last year. This remains the highest level in the marketing services industry and more than 3x that of major IT providers. Even as margins expand, we continue investing in technology and talent to support future growth. We are investing in sales and account teams at both the Stagwell and brand level as well as platforms and products such as the Stagwell Content Supply Chain, The Machine and Marketing Cloud offerings.
As a result, second quarter adjusted EBITDA increased 15% year-over-year to $108.7 million, with margin expanding 143 basis points to 17.2%. Stronger EBITDA performance is translating into improved cash flow. Year-to-date cash flow from operations was $63.7 million, an increase of $9 million or 16% compared to the first half of 2025. We expect operating cash flow to improve as the year progresses, driven by the seasonal pattern of our business and the expected second half increase in communications activity related to on-cycle election year. As a result, we remain confident in achieving our full year free cash flow conversion target of 50% to 60% of adjusted EBITDA. Deferred acquisition consideration was approximately $57 million at quarter end and we expect it to be negligible by the end of the year. Our revolver balance was $360 million at quarter end and we had $374 million of unused borrowing capacity under the credit agreement.
Net leverage stood at 3.04x. We remain on track to exit 2026 with net leverage in the mid-2s. Turning to capital allocation. We remain active with share repurchases during the second quarter. We repurchased approximately 5.9 million shares at an average price of $6.22 per share. Year-to-date, we have repurchased approximately 14.4 million shares for $88 million at an average price of $6.10 per share. Shares outstanding at the end of the second quarter were 244.4 million shares, roughly $16.8 million or 6.4% below the same period last year. The lower share count, together with stronger EBITDA growth drove adjusted EPS of $0.25, an increase of $0.07 per share or 39% compared to the second quarter last year. Year-to-date CapEx and capitalized software are in line with our expectations and reflect the continued scaling of projects already underway. We expect full year capital expenditures and capitalized software investment to be in line with last year.
We are reiterating our guidance for net revenue growth of 8% to 12%, adjusted EBITDA of $475 million to $525 million and free cash flow conversion of 50% to 60% of adjusted EBITDA. As Mark mentioned, we are raising our adjusted EPS guidance to a range of $1.03 to $1.17 per share, principally reflecting the impact of share repurchases completed year-to-date. The new guidance reflects our current share count, although continued repurchases could provide additional upside. Based on the limited acquisitions to date, we expect these targets to be achieved largely organically. Now I will hand it back over to Ben for questions.
Thank you, Ryan. I'm going to start with a question about digital transformation, in particular. Obviously, a really, really nice quarter, continuing a pretty meaningful trend here. So can you talk a little bit about what is sort of driving the strong level of growth there? And is it a sustainable thing in the back half of '26 and into '27 as well?
Well, I think it's sustainable for about 10 years. What's really driving it is the conversion to AI. As I've said for two years now, every company that touches the consumer will have to redo the way they communicate with that consumer based on AI. That is going to create an enormous backlog of work for people like us in Code and Theory that really focus on that last mile with the consumer. That's why we have the largest pipeline in history related to those kinds of services. We've also done some very smart things with the business in terms of broadening out the services, doing the partnership with Adobe, working with Palantir, bringing in the best tools that relate to either content creation or targeting. At the same time, that work is getting far more efficient because about 75% of the coding now is done agentically. So we are getting higher-level assignments, greater backlog in the pipeline and we're working more efficiently than ever to produce that work.
And maybe just a follow-up on that. This is a question from Mark Zgutowicz at StoneX. Just talking about margin trajectory within that business, particularly in the second half and again into 2027. Thirty percent plus in this quarter. Is that something we think we're going to be able to see some upside to leverage? How would you think about it?
I think the overall products that we're delivering are becoming more efficient because of our smart use of AI internally. I also think the demand from clients is urgent; they need this work done now. Time is increasingly important to those clients in terms of getting AI and agentic work in place for their communications because they save money and gain competitive advantage. As they prioritize where to put their focus, getting online as quickly as possible becomes paramount. That dynamic should support continued margin strength and potential leverage as we scale.
I want to pivot quickly to new business. Obviously, a very strong quarter, continuing those trends. Question from Jason Kreyer at Craig-Hallum. We've heard agency peers in the market talking about a tougher environment for new business. Are you seeing any shortage of new business opportunities? Can you lay out what you're seeing in the new deal environment right now? Are there any key themes in what people are asking for? And why is Stagwell performing so well in competitive bids?
We're seeing comparative and competitive differences come to the fore. Some competitors have stepped back from creativity, assuming AI will replace it or that it will be commoditized. We stepped up with premium creativity that helps brands differentiate themselves, and we're finding that wins in the marketplace. That's why we won so many bigger and renowned accounts from legacy players. Human creativity powered by AI is what's going to win, and big companies need that to differentiate themselves in an increasingly competitive world. We're also growing pipelines in digital transformation, government and globally as we build out the division in other regions. We restructured our U.K. business with a new team approach that's resulting in double-digit organic growth there. Overall, we're competing effectively by combining creativity, technology and operational agility.
Great. I'm going to combine a couple of questions because there are a lot of interesting items here. Laura Martin has asked, can you talk about how you're using AI to accelerate revenues and/or lower costs? I also want to bring in a little bit about CapEx — how it's trended in the first half of the year and how you're thinking about it in the back half of the year. Mark, how are you thinking about using AI to accelerate revenues and lower costs?
We set out about eighteen months ago to infuse AI throughout every process. We've always had a strong internal technology team built to help the entire enterprise, not just individual brands. That team has been at the forefront of implementing AI. Ryan has led efforts to apply AI to back-office services, and our engineers have applied agentic coding to make work faster, simpler and better. All of those initiatives are defining Stagwell as a leading transformer of marketing today. AI is improving productivity, reducing cycle times and enabling higher-value work, which accelerates revenue and lowers costs across the business.
Maybe on the CapEx question.
Last year, we added about $145 million to our fixed assets. Excluding intangibles, the capital investments were close to $125 million. For this year, we expect to be in about the same range from a balance sheet perspective. In terms of cash flow, last year we funded about $111 million of that, so some of that pickup carried over into this year. We're closer to $90 million funded this year and we'll probably keep the same pattern. You'll see the same contribution both from the investment and from the cash perspective this year.
Remember, we've changed the way we're investing capital. We are doing fewer new acquisitions, more CapEx — which we expect to come out at the same level this year as last year — and share buybacks as part of our capital allocation.
Question here about The Media Machine. It launched at the beginning of June. Why is that important and how is it going to drive revenue for the business moving forward? What's traction looking like so far?
We view media from a performance-first objective. Some other players have become primarily media companies focused on scale or principal media. We are coming in with a different approach: technology-first, agentic-first and performance-first. We believe we'll carve out increasing market share as we reveal the new tech products underlying our media operation. The Media Machine is designed to give clients performance, control and transparency. Stay tuned for further announcements as we take an even more competitive stance on media against legacy players.
I want to dig into the enterprise tech products. You mentioned $16 million of committed revenue and $16 million of pipeline. Where are you at on that? Are you on track and what are you looking for through the rest of the year?
I have a lot of experience in technology and I know it's not always easy to build, but our teams are fully on track with timing. I set $25 million as the first-year goal and we're on track for that. That sets us up well to go full bore next year. Importantly, while keeping overall labor expenses down, we're investing in new sales teams that are just coming on now. Those sales teams are different from our marketing services sales infrastructure; they'll collaborate with our service teams to sell products to clients and the outside market. You should see significant expansion of technology-driven revenue next year as those sales efforts scale.
Two more questions. First, a bit shorter: political. How is it looking into the back half of the year and as a driver there? And looking ahead to 2028, when should that presidential cycle really kick off?
Political is on track. Typically, midterm elections are about the size or close to the size of the past presidential election, and then the presidential election represents a new level of campaign involvement and expenditure. So far, we're seeing things on track. The day after the midterms, the presidential race will start in earnest, and there will be significant political work in 2027, especially in the second half with the presidential primaries, which will pick up fundraising and other activities. This is going to be a political super cycle unlike anything we've seen in modern history.
I want to finish with a detailed question about capital allocation, particularly in the back half of the year. Investors note you'll generate a lot of free cash in the back half based on guidance. How do you think about capital allocation around M&A, stock buybacks and debt pay-down heading into the second half? Is buying back stock the right way of thinking about it given how cheap the stock is?
We did not make many acquisitions during the first half, so there will be some acquisitions in the second half but the year will be primarily driven by organic revenue. We're reaching the 8% to 12% target more from higher organic growth than from acquisitions. Going forward, expect a balanced approach: continue buybacks, fund CapEx and do selective acquisitions. We expect to exit the year closer to the mid-2s on leverage. As our stock value increases, it may become even more effective to pursue certain transactions. So you'll see a balanced capital allocation approach in the second half.
And just on M&A and the strategy of diversifying the business and strengthening parts of the business, will acquisitions be smaller or larger? How do you think about that?
At this point, I don't see anything huge or disruptive coming. Our pattern has been buying small to mid-sized companies in areas with excellent growth potential, continuing our path from global full service to platform self-service. We've also diversified in owned media properties and will continue to look at acquisitions in that area or related areas. Those smaller, targeted deals have been contributing to the bottom line and fit our strategy.
Yes. But organic is the key to the story in 2026.
Absolutely.
And with that, I think that's most of the questions we've covered at this point in time. We really appreciate you taking the time to listen in today. We'll have another earnings call for our third quarter later in the year. Any questions, please reach out to ir@stagwellglobal.com. We'd be more than happy to answer them. Thank you.