Business Context and Reporting Period
Stagwell Inc. is a global marketing and business-solutions company providing digital transformation, creativity and communications, performance media and data, and consumer insights and strategy services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022.
Comparisons with 2021 are not fully comparable because Stagwell completed the MDC Partners combination on August 2, 2021. Stagwell Marketing Group is the accounting acquirer, and MDC results are included only from the acquisition date in 2021, while 2022 includes the combined business for the full periods.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $663.8 million | $466.6 million | $1,979.6 million | $857.4 million |
| Operating income (loss) | $70.1 million | $(19.6) million | $173.0 million | $10.8 million |
| Net income | $35.3 million | $7.9 million | $93.4 million | $31.2 million |
| Net income attributable to common shareholders | $10.6 million | $(2.1) million | $33.7 million | $20.2 million |
| Diluted EPS | $0.08 | $(0.06) | $0.26 | $(0.06) |
| Adjusted EBITDA | $115.1 million | $87.5 million | $327.8 million | $150.1 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $73.1 million | $20.1 million |
Operating margin was approximately 10.6% in Q3 2022 and 8.7% for the first nine months of 2022. Adjusted EBITDA margin based on reported revenue was approximately 17.3% and 16.6%, respectively. The filing does not present a consolidated net profit margin as a primary metric.
Revenue and Segment Performance
- Q3 revenue increased 42.3% year over year, while nine-month revenue increased substantially, primarily reflecting the MDC combination and other acquisitions.
- Q3 organic net revenue increased 11.7%; nine-month organic net revenue increased 30.0%. Organic growth was attributed to higher spending by existing clients and new-client wins.
- Q3 segment revenue was $367.1 million for Integrated Agencies, $171.5 million for Brand Performance, $121.8 million for Communications, and $3.4 million for All Other.
- Communications benefited from higher public relations and advocacy activity, including election-year demand. Historically, the fourth quarter is Stagwell’s highest-revenue quarter.
Cash, Debt, and Liquidity
- Cash and cash equivalents were $165.3 million at September 30, 2022, compared with $184.0 million at December 31, 2021.
- Net cash provided by operating activities was $73.1 million for the nine months, compared with $20.1 million in the prior-year period.
- Investing cash outflows were $64.3 million, including $37.5 million for acquisitions and $25.5 million of capital expenditures.
- Net debt reported on the balance sheet was $1.329 billion, consisting primarily of $1.100 billion of 5.625% senior notes and $245.0 million drawn on the revolving facility, net of debt issuance costs.
- The revolving facility had $230.0 million of availability after $245.0 million of borrowings and $25.0 million of undrawn letters of credit. The company’s reported total leverage ratio was 2.83 versus a maximum covenant level of 4.50.
- Management stated that existing cash, operating cash flow, and available revolver capacity are expected to fund anticipated needs for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Profitability improved materially: Q3 operating income increased from a $19.6 million loss to $70.1 million of income, and common-shareholder earnings moved from a $2.1 million loss to $10.6 million of income.
- Adjusted EBITDA increased 31.5% in Q3 and 118.4% for the nine months, although 2021 comparisons are affected by the MDC transaction and acquisition-related items.
- Interest expense increased to $19.7 million in Q3 and $56.6 million for the nine months, primarily because of higher debt associated with the MDC combination.
- Impairment and other losses increased to $25.2 million in Q3 and $28.0 million for the nine months. The nine-month charge primarily included $23.1 million of goodwill impairment and $2.0 million related primarily to a right-of-use lease asset.
- Foreign currency translation produced a $59.7 million loss in other comprehensive income for the nine months, reducing Stagwell shareholders’ comprehensive income despite GAAP net income.
- The company repurchased approximately 4.0 million Class A shares for $28.7 million during the nine months under a $125.0 million authorization; $96.2 million remained available at September 30, 2022.
Guidance, Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance is provided in the filing. Management expects sufficient liquidity for the next twelve months but notes that future performance, refinancing access, acquisitions, and contingent obligations could affect liquidity.
- Management does not currently expect COVID-19 or the Russia-Ukraine conflict to have a material adverse effect, but adverse economic conditions could reduce client marketing budgets and increase client credit risk.
- The company’s annual goodwill impairment test as of October 1, 2022 was in process. Seven reporting units with approximately $590 million of goodwill had fair value less than 20% above carrying value, creating potential future impairment exposure if performance weakens, a recession develops, or interest rates rise.
- Deferred acquisition consideration was $159.6 million at September 30, 2022, including approximately $42.4 million expected to be settled in Class A shares. Redeemable noncontrolling interests were $65.8 million, and future payments depend on business performance and exercise of contractual rights.
- The company recorded a $17.6 million Tax Receivables Agreement liability and expects future cash payments equal to 85% of certain realized or deemed tax savings.
- Disclosure controls and procedures were concluded to be ineffective at a reasonable assurance level because of previously identified material weaknesses in internal control over financial reporting. Remediation activities are expected to continue through the first quarter of 2023; the weaknesses will not be considered remediated until controls operate effectively for a sufficient period.
- On October 3, 2022, after quarter-end, Stagwell acquired Maru Group, the remaining interest in Wolfgang, and assets of Epicenter Experience. Purchase price allocations were not complete at the filing date.
Investor Verification Points
- Verify the comparability of year-over-year growth metrics given the August 2021 MDC reverse acquisition and the contribution of acquisitions.
- Assess organic growth, client retention, new-business activity, and the sustainability of election-related Communications Network demand.
- Monitor goodwill impairment testing, particularly the reporting units with limited excess fair value over carrying value.
- Review debt maturities, variable-rate exposure, covenant compliance, and the effect of higher interest rates on cash flow.
- Quantify future cash requirements for deferred acquisition consideration, redeemable noncontrolling interests, leases, the Tax Receivables Agreement, and other commitments.
- Track remediation of material weaknesses in internal control and the company’s progress toward effective controls.