Stagwell Inc. 10-Q Summary
Business context and reporting period
Stagwell provides marketing, communications, media, digital, creative, experiential and data-driven services through its agency networks. This report covers the three and nine months ended September 30, 2021.
On August 2, 2021, Stagwell completed its combination with MDC Partners. The transaction was accounted for as a reverse acquisition, with Stagwell Marketing Group treated as the accounting acquirer. Accordingly, periods before August 2, 2021 primarily reflect Stagwell Marketing Group and are not directly comparable with periods after the transaction, which include MDC results from the acquisition date.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $466.6 million | $228.1 million | $857.4 million | $575.0 million |
| Net revenue | $409.3 million | $152.9 million | $749.2 million | $434.1 million |
| Operating income (loss) | $(19.6) million | $26.4 million | $10.8 million | $44.9 million |
| Net income | $7.9 million | $21.4 million | $31.2 million | $38.8 million |
| Net income (loss) attributable to common shareholders | $(2.1) million | $17.8 million | $20.2 million | $34.1 million |
| Adjusted EBITDA | $87.5 million | $37.1 million | $150.1 million | $79.0 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $20.1 million | $93.2 million |
Q3 revenue increased 104.6%, while nine-month revenue increased 49.1%. Organic net revenue increased 54.2% in Q3 and 31.6% for the nine-month period. Adjusted EBITDA margins were approximately 18.7% in Q3 and 20.0% for the nine-month period, compared with approximately 16.3% and 18.2%, respectively, in the prior-year periods. GAAP operating margins were approximately negative 4.2% in Q3 and 1.3% for the nine-month period.
The Q3 operating loss included $53.5 million of merger-related stock-based compensation and $14.9 million of impairment and other losses, primarily related to abandoned Media Network trade names. The company also recorded a $45.6 million gain on sale of business and other, including an approximately $43 million gain from the sale of Reputation Defender.
Material changes versus the prior comparable period
- The MDC combination materially expanded the consolidated scale, adding $241.3 million of revenue from the acquisition date through September 30, 2021 and substantially increasing goodwill, intangible assets, lease assets and debt.
- Integrated Agencies Network revenue increased to $288.5 million in Q3 from $55.3 million, and Media Network revenue increased 70.2% to $103.4 million. Communications Network revenue decreased 37.0% to $67.3 million, primarily reflecting lower advocacy activity compared with the 2020 election period.
- Adjusted EBITDA increased 135.8% in Q3 and 90.0% for the nine-month period, but GAAP operating income declined because of merger-related compensation, higher amortization, transaction-related costs and impairment charges.
- Interest expense increased to $11.9 million in Q3 and $15.2 million for the nine-month period, primarily because of debt incurred in connection with the MDC transaction.
- Cash flow from operations declined to $20.1 million from $93.2 million, primarily because of unfavorable working-capital movements and acquisition-related effects.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $115.5 million at September 30, 2021, compared with $92.5 million at December 31, 2020.
- Total debt, net of issuance costs, was $1.266 billion, compared with $198.0 million at December 31, 2020. Debt consisted primarily of $1.1 billion of 5.625% senior notes due 2029 and $181.1 million outstanding under a $500 million senior secured revolving facility.
- The company reported $292.8 million of availability under the revolving facility and compliance with its debt covenants. The reported total leverage ratio was 3.08, versus a maximum covenant level of 4.75.
- The company issued $1.1 billion of 5.625% notes and used proceeds in part to repurchase $870.3 million of 7.50% senior notes.
- Current liabilities were $1.071 billion, including $286.8 million of advance billings and $61.0 million of current deferred acquisition consideration.
- Future obligations include deferred acquisition payments, potential purchases of noncontrolling interests, lease obligations, debt service and approximately $31.3 million related to three operating leases that had not commenced at quarter-end.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects cash flows from operations, cash on hand and available revolving-credit capacity to fund anticipated needs for the next twelve months, while noting that this depends on future operating performance and economic conditions.
- Management cited recovery in client spending following COVID-19 disruptions as a significant driver of organic growth, but warned that continued pandemic effects could reduce demand and client marketing budgets.
- Key risks include failure to realize expected combination benefits, integration and acquisition execution, client losses or reduced spending, retention of key employees, achievement of cost savings, foreign-exchange volatility, debt covenant compliance and funding contingent acquisition obligations.
- Redeemable noncontrolling interests totaled $29.8 million at September 30, 2021. Exercise timing and amounts depend on contractual conditions and subsidiary performance.
- The company agreed on October 1, 2021 to acquire the remaining 26.7% of Targeted Victory for cash and potentially Class A shares, with total consideration capped at $135 million subject to specified exceptions.
- Preferred shares were scheduled for conversion into Class A common shares in October and November 2021. The filing reports 113,198,517 Class A shares outstanding as of November 8, 2021.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2021 because of material weaknesses in Stagwell Marketing Group’s internal control over financial reporting. Remediation was not yet complete and was expected to continue through 2022.
Most important facts for investors to verify
- Reconcile post-combination results with pre-combination comparatives, recognizing that the periods are not fully comparable.
- Assess leverage, interest burden, refinancing needs and compliance with the revolving-credit and senior-note covenants.
- Separate recurring operating performance from the $43 million Reputation Defender gain, $53.5 million merger-related stock compensation and $14.9 million impairment charge.
- Monitor operating cash conversion and working-capital requirements, particularly accounts receivable, advance billings and client-billable expenditures.
- Review the remediation of material weaknesses and the effect of preferred-share conversions, noncontrolling interests and potential Targeted Victory purchase payments on ownership and per-share economics.