Stagwell Q3 2023 Earnings Call Transcript

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November 2, 2023

Key Takeaways

  • Q3 net revenue was $535 million, down 3.8% year-over-year, but Performance Media & Data and the Stagwell Marketing Cloud each posted double-digit growth and Creativity & Communications returned to positive net revenue growth.
  • Stagwell achieved a record $155 million of net new business over the past two quarters (including $81 million in Q3), with client churn down to just $7 million and its top 100 customers growing 18% year-over-year.
  • International net revenue grew 25% year-over-year (15% organically), led by 14% growth in Asia and 16% in EMEA, reinforcing the company’s strategy to diversify globally.
  • Adjusted EBITDA was $102 million (19% margin), driven by $82 million of annualized cost savings—which cut staffing costs as a percentage of net revenue by 360 basis points—and ongoing efficiency efforts.
  • Stagwell sold Concentrix Life for $245 million to redeploy capital, and acquired Left Field Labs and Movers & Shakers to accelerate its AI-led digital transformation offerings, as it expects net revenue growth in Q4 and stronger growth in Q1 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Stagwell Q3 2023
00:00 / 00:00

There are 3 speakers on the call.

Operator

Good morning from Stagwell's offices in Miami, Florida, and welcome to Stagwell Inc. Earnings webcast for Q3 2023. My name is Ben Alton, and I lead the Investor Relations function here at Stagwell. With me today are Mark Penn, Stagull's Chairman and Chief Executive Officer and Frank Lanuto, the Chief Financial Officer. Mark will provide a business update and Frank will share a financial review.

Operator

After the prepared remarks, We will open the floor for Q and A. You are welcome to 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/investor, for an investor presentation and additional resources.

Operator

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.

Speaker 1

Thank you, Ben, and thank you to everyone joining us for our earnings call. Our company is emerging from a more challenging economic environment this year, stronger and more nimble than ever And poised to return to growth. This quarter demonstrates that we have our costs under control as we invest in expanding our digital and global footprint. 2023 threw a number of curveballs at us, tech companies that engaged in mass firings and cutbacks, Which adversely affected our digital transformation business. A banking crisis that knocked out the First Republic Bank, a significant client.

Speaker 1

A B2B recession as clients held back marketing and digital projects fearing a recession that was always around the corner rising interest rates An auto strike that froze auto marketing and a writers' strike in Hollywood that downed our entertainment research business. Throughout this, we stayed on our mission, bringing costs in line, installing central data and information systems, Expanding our presence and footprint in the industry, winning new business, and now just about all of those negative factors are in retreat. And we've returned to earning over $100,000,000 of EBITDA a quarter, even in a low point of the political cycle. As we head into the end of the year, we believe we've reached a key inflection point for our business, and we expect to return to modest net growth, Excluding advocacy in the Q4 and stronger growth in Q1 2024, we've already returned to growth in most areas of the business. 2024 offers a significant number of tailwinds that allow me to call a bottom here.

Speaker 1

1st and foremost, we will have trimmed our costs to be well positioned to hold and expand our target 20% plus margin next year. Tech companies are coming back and starting to spend again. AI offers a whole new class of digital transformation work we have the engineers to implement. Fear of recession seems to be easing in favor of a soft landing. The political season will be a record one.

Speaker 1

The strikes are all ending And digital spending ad spending is expected to grow. Since our last earnings call, we've made significant progress to manage our costs And to advance our long term strategy, cut a further $34,000,000 of annualized costs from the business As we right size our staffing cost structure as we look ahead to 2024 and announced the divestiture of Concentrix Life to Accenture for $245,000,000 in cash. We also accelerated digital services Through acquisitions, including Left Field Labs, a cutting edge digital transformation company leveraging AI and AR To create truly innovative digital customer experiences and movers and shakers, a disruptive creative agency Renowned for its social and emerging platform capabilities. Turning to our results. Stagwell posted 3rd quarter net revenue of 5 $35,000,000 down 3.8 percent from the prior year.

Speaker 1

We saw continued momentum in Performance Media and the Stagwell Marketing Cloud We're both posting double digit net revenue growth year over year, and we returned to positive net revenue growth In our creativity and communications capability this quarter, strong performance in these businesses was offset By challenges in digital transformation and consumer insights, particularly our entertainment research firm. Perhaps most importantly, we continue to deliver strong net new business, capturing more than $81,000,000 in the 3rd quarter, Maintaining our strong momentum from the second, our net new business figure of $155,000,000 is a record company Company record for back to back quarters. Clients leaving us is down to a record low of $7,000,000 So our client base is expanding, setting us up well for an economic recovery. The orientation of our business towards our largest, most impactful relationships continued in the 3rd quarter. Our top 100 customers grew 18% year over year with 3 customers exceeding $50,000,000 of annual spend in the last 12 months.

Speaker 1

International also continues to be a real bright spot for our business as net revenue grew overall 25% in the 3rd quarter. Organic net revenue from our international business was 15%, led by outsized growth of 14% in Asia and 16% in EMEA. This performance speaks to the benefit of continuing to diversify our business internationally, a core tenet of our overall growth strategy. In the last few weeks, we've added to our affiliate network, partnering with Marcus Agency in Vietnam and Coloradria in Brazil, Allowing us to expand our reach in these regions. We also, earlier this year, acquired Husky's, an Irish Digital Agency, And are exploring further acquisitions that will expand our reach in Latin America, Europe and the Mideast.

Speaker 1

Our adjusted EBITDA came in at $102,000,000 more than $10,000,000 sequential improvement over the 2nd quarter And representing a margin of 19%, a 2 10 basis point improvement over the 2nd quarter and a 5 20 basis point improvement since Q1. This is a direct result of the actions we have taken to right size our staffing levels, steps that have led to an $82,000,000 Annualized reduction in staffing costs. Our staff costs as a percentage of net revenue currently stand at 63.4%, a 360 basis point improvement since the end of the Q1. As we've trimmed our costs, we have continued to invest in key growth areas. The Stagwell Marketing Cloud is one such area, And our EBITDA would be higher if not the $8,000,000 OpEx investment we made in the area during the quarter.

Speaker 1

We posted $0.18 of adjusted earnings per share during the quarter, a 13% improvement sequentially. Stagwell now expects to generate $390,000,000 to $410,000,000 of adjusted EBITDA in 2023. This should translate into about $0.73 to $0.78 of adjusted EPS. We expect overall Organic net revenue growth to be about negative 4%, excluding advocacy. Organic net revenue growth is expected to be About negative 2.5%.

Speaker 1

Given the litany of events occurring this year, this temporary retrenchment is a testament to the resilience of the business and its ability to meet its long term growth targets. Our agencies continue to be recognized for their market transforming work. Just last month, Colm McPhoy was recognized as the midsized agency of the year, and Gale, our business consultancy, crowned the number 1 fastest growing large agency, Both by Adweek. Additionally, Code and Theory, our leading digital transformation agency, won a highly coveted Fast Company Innovation by Design award for its brand and technical work for YETI. If 2023 has been a year of efficiency for the tech companies, We believe that 2024 will be a year of competition for them.

Speaker 1

The last few years have seen the biggest tech companies move from their previously defined areas of strength To compete directly against each other in areas like the cloud enterprise, productivity products, hardware and AI, Which has brought another area of competition which these companies will have to address. We believe this will lead to a significant increase in digital transformation spending. Our expertise in delivering AI enabled marketing and enterprise transformation positions us extremely well to Capitalize on this long term tailwind. We've already done award winning work with generative AI and audience development at Code and Theory For Tepico, a European sports betting giant, and are also helping the publisher, Riniez, build the newsroom of the future with AI. Additionally, we've recently signed a large office retailer into our enterprise AI solution in the Stagwell Marketing Cloud called the Private GPT.

Speaker 1

The strikes in Hollywood, which affected our consumer insights and strategy capability, dragging it down 9% in the 3rd quarter are almost over, And we expect this business to return to normal levels by Q4 and next year. Digital transformation excluding advocacy Was down 17% in the 3rd quarter, but all signs point to a return to both sequential and year over year net revenue growth in the 4th quarter. We continue to examine our portfolio and the best ways to deploy capital. Yesterday, We announced the closing of a transaction to sell Concentric Life, a prescription drug marketing agency to Accenture. Stagwell has an amazing track record of acquiring businesses and driving meaningful improvement in revenue and profitability.

Speaker 1

This fact was reflected in the $245,000,000 selling price, which represented a 4x to 5x return on our initial investment in the business. In the transactions we've completed or expect to complete this year, we will replace By year's end, all of the divested revenue and EBITDA for a cash outlay of less than a 5th of that sales price, Giving us the ability to use the additional capital to accelerate growth over the next few years, while prudently managing our balance sheet And deploying targeted share repurchases against the $155,000,000 remaining in our authorized buyback. We've developed not only one of the world's top tech infused marketing service companies, but we have also created a great Platform for acquisition and growth of such firms. The double digit EBITDA ratio of this asset, which no analyst in my recollection And over 50 such meetings even asked about is representative of the value of many of our portfolio companies, Totaling 1,000,000,000 of dollars, which should command an even higher value when brought together at scale as we do at Stagwell. Our goal is to fine tune our portfolio by pairing back on non core assets and investing in AI and global expansion to get to scale In all of our services.

Speaker 1

There's one other non core asset which we're actively exploring divesting at this time, Which we expect will yield the transaction about half the size of Concentric Life by the end of the year. Additionally, on the M and A front, we recently announced the acquisition of Left Field Labs, which will form a critical part of our strategy to lead The AI transformation of marketing. Left Field has built a track record of designing experiences and products never imagined before And adds end to end services encompassing strategic innovation, user experience design, adept prototyping and cutting edge Technological Engineering. We have also acquired Movers and Shakers, crowned by Adweek, as the world's best agency on TikTok. Movers joins to supercharge our ability to connect brands to culture and resonate with Gen Z and millennial consumers.

Speaker 1

They boast particular strength in mainstream social and emerging digital platforms, which will be complementary to the Constellation network. The Stagwell Marketing Cloud remains a major investment focus for us. This is the 2nd quarter we've broken out financials for the business Unit and the first time that we've reported it as a standalone capability. For the Q3, the reported SMC revenue growth of 20% year over year with an annualized run rate of just under $200,000,000 We're staying ahead of the AI transformation of marketing with product innovation and partnerships. Senior leaders from across our digital shops and creative firms are Collaborating to devise a Stagwell level service offering on AI will begin to pitch to clients next year.

Speaker 1

In the meantime, SMC is forging ahead with AI advancements. We've added AI powered influencer marketing and media monitoring to profit And launched Harris Quest, an integrated suite of self-service AI enabled research tools for modern marketers. We also expect to announce shortly a partnership with a major cloud provider that will offer marketing and developing a marketing and development boost to our cloud products. Finally, we continue to explore options to augment our media studio within SMC, including working with or acquiring a DSP as we identify ways to compete for a wide range of large and small clients for programmatic media. As 2023 draws to a close, I wanted to reiterate our confidence that the top line challenges that have pressured our business this Are beginning to abate.

Speaker 1

We expect to see a return to net revenue growth, excluding advocacy, in the 4th quarter As customers in the technology and media sectors begin to resume their activities and as customers start to refocus on digital transformation. 2024 promises to be a big year for Stagwell, driven by this spending turnaround among tech customers and on digital transformation, As well as tailwinds from what we expect to be a record breaking political cycle and continued growth in our Marketing Cloud products. As I said last quarter, with growing large company relationships, strong new business momentum, a commitment to managing costs and investment in leading tech products, Stagwell remains strongly positioned to benefit from the long term growth in digital marketing and in particular, the next revolution of AI based Digital Transformation in the Space. Now, I'd like to hand it over to Frank Lenuto, our Chief Financial Officer, to walk you through some of our financial results in more detail.

Speaker 2

Thank you, Mark. Good morning, everyone, and thank you for joining us to discuss our 3rd quarter results. As a reminder, if you would like to ask a question after the prepared remarks conclude, please feel free to submit them through the chat function. In Q3, we continue to make progress improving our operating performance across the business. Revenues were stronger in international markets as well as our media and data and creative and communications capabilities, which returned to growth despite the ongoing headwinds in the U.

Speaker 2

S, our largest market. We also continued to improve operating efficiency and margins with further cost savings and compensation, real estate and the consolidation of back office operations. As a result, reported revenue for Q3 was $618,000,000 a decline of 7% as compared to the same period in the prior year. Net revenue, excluding pass through costs, declined 3.8% year over year to $535,000,000 Organic net revenue declined 6.8%. Excluding advocacy, Organic net revenue declined 4.6 percent for the period.

Speaker 2

Breaking down net revenue by geography, we continue See strong performance in our international markets. Overall, organic net revenue increased 15% internationally, led by EMEA, which increased 16% and followed closely by APAC, which grew 14%. In the U. S, where macroeconomic headwinds, tech company restructurings and labor strikes in the entertainment and auto industries persisted, Organic net revenue declined 9.9%. Despite macro conditions, many of our largest customers Continued to demonstrate resilience.

Speaker 2

In the Q3, our top 100 customers representing approximately 48% of net revenue grew 18% year over year. Although budgets have been compressed to a greater extent by smaller clients, Many of our larger clients have continued to invest in marketing spend, supported by the strength of the U. S. Consumer. Now turning to revenue by capability, we have now expanded our reporting to include the Stagwell Marketing Cloud Group as a new separate capability.

Speaker 2

For historical like for like comparability, please reference the historical core metrics document on the Stagwell Investor website. Digital Transformation delivered $126,000,000 of net revenue in Q3, a decline of 20% compared to last year. Excluding advocacy, which is in an off election cycle year, the decline was 17%. As I mentioned previously, challenging macroeconomic conditions continue to weigh on the Capability as customers chose to delay the start of business transformation projects. From an industry perspective, financials, Healthcare and technology experienced the principal reductions in budgets.

Speaker 2

Financials were impacted by the banking turmoil earlier in the year, While the healthcare decline was largely driven by the lapping of the end of the pandemic, which saw some customers in the medical testing and diagnostic space Pull back. Consumer insights and strategy reported $46,000,000 in net revenue, a decline of 9% year over year. Much of the weakness was attributable to the lingering effects of the writer and actor strikes in the 2nd 3rd quarters. Excluding the temporary impact on our entertainment research business, our consumer insights business grew 4%. Performance Media and Data reported $72,000,000 in net revenue, an increase of 11% year over year.

Speaker 2

The strong growth was driven by increased spend in the transportation and travel vertical, which continues to recover from the pandemic. Performance Media has been a standout performer in 2023, despite a challenging macro environment, posting positive year over year growth each quarter. Creativity and communications delivered $244,000,000 in net revenue in the 3rd Quarter, a year over year increase of $1,000,000 Excluding advocacy, net revenue increased $6,000,000 or 3%. This marks a return to positive growth for the capability and continues a trend of sequential improvement throughout 2023. Stagwell Marketing Cloud Group delivered more than $47,000,000 in net revenue in the 3rd quarter, representing a 20% increase over the prior comparable period.

Speaker 2

Dollars 36,000,000 of this net revenue came from our Advanced Media Platforms Group and approximately $11,000,000 was derived from our software platform products. In the Q3, we ramped up our investment spending in the Stagwell Marketing Cloud by $6,400,000 over the prior year period. As we drive to deliver the suite of self-service products to our clients, enabling them to perform a host of marketing communication activities in house. Now moving to operating expenses and profitability. We have continued to take decisive action to manage costs as the pressures we have previously discussed persisted.

Speaker 2

Our actions have enabled us to Drive our Q3 adjusted EBITDA margins to approximately 19%, back in line with our targeted range of 19% to 20%. I wanted to take a moment to discuss the more impactful items here. Staffing, our greatest single cost, was the primary focus of our effort. Beginning in Q1, we took steps to reduce our staffing costs as a percentage of net revenue. We have now successfully reduced the staff cost ratio to 63.4% from 67% at the end of the first quarter, an improvement of 3 60 basis points.

Speaker 2

As previously announced, we took action to eliminate $48,000,000 of annualized Staffing costs in the first half of the year. Since July, we have taken further actions amounting to an additional $34,000,000 of annualized savings, bringing our total annualized cost savings to $82,000,000 Our headcount is now about 7% lower and at the beginning of the year. We will continue to monitor our staffing levels to ensure a strong finish to 2023. We continue to make good progress towards realizing the $30,000,000 of annualized cost savings from synergies announced at the time of the merger. With the implementation of our global ERP and HR systems nearly complete, in Q3, we began consolidate our agency's finance organizations to our shared services platform.

Speaker 2

Based on actions taken thus far, More than $1,000,000 of annualized savings is anticipated. We expect to continue implementing this consolidation across our remaining brands leading to further cost savings. As part of our plan to consolidate our real estate footprint To reduce costs and increase collaboration, we have realized more than $2,500,000 of annualized savings this year to date, led by consolidation efforts in both London and New York. As a result, we delivered $102,000,000 of adjusted EBITDA in the quarter, representing 19% adjusted EBITDA to net revenue margin and paving the way to restoring our adjusted EBITDA margin 19% to 20% in line with our previous comments. As I previously noted, despite the tough macro environment, we have increased spot spending in the cloud by $6,400,000 year over year.

Speaker 2

Adjusting for this strategic investment, our adjusted EBITDA margin would have increased by an additional 140 basis points to 20.4%. Now moving to the balance sheet. We continue to take actions to improve the strength On the long term financial position, starting with deferred acquisition consideration, we reduced Obligations by approximately $28,000,000 from year end to $134,000,000 at the end of Q3. We expect to further reduce DACH by $32,000,000 in Q4. Excluding the impact of our recently announced Left Field Labs position, the year end DAC balance would be below $100,000,000 as we previously communicated.

Speaker 2

We also acquired 586,000 shares during the quarter at an average price of $4.72 per share for approximately $2,800,000 This brings our total buyback activity to date, inclusive of the Alpinvest transaction Announced on our Q1 call to approximately $193,000,000 representing 30,000,000 shares at an average price of $6.42 Our existing buyback authorization still has approximately $155,000,000 and the remaining availability. CapEx for the quarter was $8,000,000 in line with our stated target of 1% to 1.5 percent of net revenue. As a result, we ended the quarter with cash of $99,000,000 and drawings under our revolver of $412,000,000 Our leverage was 3.64x as of the quarter end, largely driven by the increase in the revolver balance used to finance our share repurchase from Alpinvest earlier this year. The concentric life disposition discussed by Mark earlier will have an immediate favorable impact on leverage and will bolster The seasonal Q4 positive cash trends of our business. Importantly, it will help us to significantly reduce Our year end net debt position to help us achieve our stated goal of reducing net leverage down to 2 times over the medium term.

Speaker 2

It will also support our ability to pursue strategic acquisitions and investments in line with our growth strategy. And finally, moving to guidance. In light of prevailing conditions, we are revising our full year guidance as follows: Organic net revenue is now expected to decline about 4% for the full year. Organic net revenue excluding advocacy is now expected to decline about 2.5% for the full year. Adjusted EBITDA is expected to be between $390,000,000 $410,000,000 and we expect to deliver 40% to 50% Free cash flow conversion.

Speaker 2

And finally, adjusted earnings per share is expected to be between $0.73 $0.78 That concludes our prepared remarks for this morning. I will now turn the call back over to Ben Alanson to open the Q and A portion of the call. Thank you.

Operator

Thank you, Frank. We're going to start with a couple of questions looking ahead. We're going to start off with a question from Jason Kreyer at Craig Hallum. What gives you confidence that digital transformation will rebound in the Q4 and into 2020?

Speaker 1

We've been looking very carefully at those couple of big companies that declared a year of efficiency. And what we're seeing now is that they're reissuing for the first time pitches, contracts, and so we're seeing those Come in now and landing on the desk of our digital transformation agencies. Plus, a lot of them have been holding back while they plan for What kind of AI products that they're going to produce for consumers, and we see that as kind of a next wave coming in next year. But our confidence is primarily based on the checks of what are the RFPs that are coming in and where they're from.

Operator

Perhaps just following up on that and a question from Mark Zugatowicz at Benchmark about tech investments and rebounds from tech customers. What are some of those signs that we're seeing that gives us confidence in that?

Speaker 1

Again, I think you saw the tech companies having gone through the year of efficiency Produce pretty strong earnings. You see, as I said before, I think they're going to have to compete now much more In the cloud and in AI products because no one owns those lanes. And again, I think thirdly, Some of the companies that adopt it as a strategy of pullback and cuts now has the new employees back in place, now have reoriented their mission, And now we saw one company that cut back from $24,000,000 $25,000,000 to almost 0, and we see the RFPs flowing again Really as of this month.

Operator

Great. Sort of just continuing on kind of the look forward a little bit, Steve Cahill from Wells Fargo. You talk about the trends in Creative and how you're managing through some of that?

Speaker 1

Sure. Look, I think, Interestingly, creative in some sense is coming back. People are more interested than ever in the Super Bowl and in great creative expression. I think what you saw with our purchase of Movers and Shakers is that we're also cognizant that people want more and more online creativity Across social media and that a lot of cost effective marketing is there. And that's where we're really bolstering, Particularly TikTok would be the fastest growing advertising medium around.

Operator

Obviously, some strong net new business trends in the quarter and actually over the course of the last 12 months. Ben Swinburne over at Morgan Stanley has just asked, can you talk about pace at which you expect some of that net new business to translate into revenues?

Speaker 1

Sure. I think that people now are getting online with it. I certainly see These contracts that we're winning coming online by the beginning of the year for sure. Some of them will start in this quarter, which gives us Some enhanced confidence about the quarter itself, but we do see the last 3, 4 months of new business piling up into a strong Next year, which is why I feel as strongly as I do about Q1 2024. Look, these are When you look at these new business numbers, these are unprecedented scopes of wins on a consistent back to back basis.

Speaker 1

When you look at some of the areas here that we've returned to growth, you look at research minus entertainment, you look at performance media, you look at Creativity and Communications. And you look on top of that, this kind of new business showing our position in the business, Add to that digital and add to that sorry, rather political and add to that return to really the single area That has been a big drag this year, digital transformation. That's how these things come together.

Operator

Shifting a little bit to M and A and particularly some questions around the Concentrix Life deal that we announced last week and closed yesterday. It was helpfully this is a question from Barton Crockett at Rosenblatt. It was helpfully accretive and the timing is good given current pressures across your company. You say you're looking at other potential divestments. Can you provide some more color on that potential?

Speaker 1

I think that we're looking at probably one more asset about Half the size. It will equally be something that nobody ever asked me about in any of the calls. So I think that they'll be generally Surprised that the again, the value under our hood is really quite tremendous. And our ability then To restore and even take a sale in these double digit multiples, you actually take a look at the Concentrix at 18 multiple, Our ability then to buy stuff at 5, 6, 7 multiples and then grow them is really how tremendous value is built in our assets And should be built in our stock and outside value appreciation.

Operator

Geographic expansion has obviously been Tenant of the M and A approach, Brett Feldman here asked and Goldman asked, getting scale in international markets Seems like a key way you can position Stagwell to win larger contracts with your largest customers. What do you see as the most effective path to spending your presence outside the U. S. Both organically and inorganically?

Speaker 1

Well, the first thing that we did was really to bring together the existing assets We had in these regions. They had been really quite scattered. So you really kind of see the double digit growth in Asia after we brought all of our agencies together In Singapore headquarters and put in infrastructure in. In Europe, in January, almost all our European agencies in London will all come together Into a physical facility work together and then you see the same kind of EMEA growth where they're able to kind of show the true scale of operations there. We found that's the first path to double digit growth and really to take existing assets that were not seeing growth and really turn them into double digit growers.

Speaker 1

I think in terms of investment, we're still looking at Latin America. The Mideast is in a bit more turmoil at the moment, But we'd like to beef up in those two regions to be to have a better positioning for large global contracts. By the way, just to go back to an earlier question, we are seeing a very strong pitch season here in the Q4.

Operator

Maybe just one final question on political before we hand over to Frank for a couple of questions on the financials. But Question from Jeff Van Sinderen over at B. Riley. What are the early reads on the magnitude and possible timing of advocacy revenue contribution as we enter the year leading up presidential

Speaker 1

election. Well, I think all reads are that this is the going to be the biggest spending Election in history exceeding $12,000,000,000 of expenditures. I think the timing is a little less clear Because we don't know what's going to happen in terms of how much activity there'll be in primary fights. It looks like there isn't really a Democratic primary fight, so that'll push Some of their spending later. Looks like there may or may not be a Republican fight.

Speaker 1

We'll really find that out as these contests start to happen In Iowa and New Hampshire. So I think it we know that the crescendo is going to be hit the closer you get to the election. We don't know how much of it will come in, in 1st versus second quarter, depending upon how the primary season works its way out.

Operator

Maybe just a quick question for Frank here, and this is looking at our free cash flow conversion, a question from an investor, just saying, what was the driver of the change in conversion from 55% and the midpoint previously down to 45%.

Speaker 2

Yes, certainly. I think it's 2 things. 1, it's interest, both a function of Higher rates throughout and raising rates throughout 2023 and also the higher average outstanding balance. We financed the Acquisition of a larger share purchase, but this was more of a one time event. So it's a temporary condition and that should bring interest Down in 2024 is our expectation.

Speaker 2

And then second, we see potentially just some lighter prepayments perhaps In Q4, and I think that's all it is. Great.

Operator

I think we're just coming to a close here, but Richard, one question on a slightly lighter note. Are the blue shirts the new Stagwell uniform?

Speaker 1

They were my uniform at Microsoft and they're the uniform at Here at Stagwell.

Operator

Good stuff. Well, that brings our Q3 earnings call to a close. If you have any questions, please do feel free to reach out to the IR team over here at Stagwell, and we look forward to chatting to you early next year for our Q4.

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