Stagwell Inc. Form 10-Q Summary
Business Context and Reporting Period
Stagwell provides marketing and business solutions through a global portfolio of marketing services firms, combining data, creativity, technology, media, communications and strategic consulting. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Reportable segments are Integrated Agencies Network, Brand Performance Network and Communications Network, with additional activity reported in All Other and Corporate. The Company recast prior-period segment information following changes to its internal reporting structure.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $632.3 million | $672.9 million | $1,254.7 million | $1,315.8 million |
| Operating income | $21.3 million | $48.3 million | $37.5 million | $103.0 million |
| Net income (loss) | $(10.2) million | $24.5 million | $(15.3) million | $58.1 million |
| Net income (loss) attributable to Stagwell common shareholders | $(4.7) million | $10.5 million | $(4.3) million | $23.1 million |
| Basic and diluted EPS | $(0.04) | $0.08 | $(0.04) | $0.19 basic; $0.18 diluted |
| Adjusted EBITDA | $91.2 million | $111.3 million | $163.4 million | $212.7 million |
| Net cash used in operating activities | Not separately reported for the quarter | $(144.1) million | $(107.3) million |
Q2 revenue declined 6.0%, while six-month revenue declined 4.6%. Operating margin was approximately 3.4% in Q2 2023 versus 7.2% in Q2 2022, and approximately 3.0% for the first six months versus 7.8% in the prior-year period. Adjusted EBITDA margin was approximately 14.4% in Q2 and 13.0% for the first six months, compared with 16.5% and 16.2%, respectively, in 2022.
- Organic net revenue declined 5.3% in Q2 and 4.2% for the first six months, primarily due to client losses and lower spending by existing clients.
- Q2 segment revenue declined 6.1% in Integrated Agencies, 3.2% in Brand Performance and 17.7% in Communications. Communications was affected by lower advocacy activity following elevated 2022 election-related spending.
- For the first six months, Brand Performance revenue increased 2.4%, primarily reflecting acquisitions, while Integrated Agencies declined 5.8% and Communications declined 23.1%.
- Interest expense increased to $23.7 million in Q2 and $41.9 million for the first six months, driven primarily by higher debt and Credit Agreement borrowings.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $105.3 million at June 30, 2023, down from $220.6 million at December 31, 2022.
- Operating activities used $144.1 million of cash in the first six months, primarily due to unfavorable working-capital timing, including media supplier payments.
- Investing activities used $30.1 million, including $10.4 million of capitalized software, $8.0 million of capital expenditures and $5.0 million for acquisitions.
- Financing activities provided $58.5 million, including $302.0 million of net revolving-credit borrowings, offset by $199.4 million of share repurchases, $28.6 million of deferred consideration payments and $15.4 million of distributions to noncontrolling interests.
- Long-term debt was $1.487 billion, consisting of $402.0 million outstanding under the revolving Credit Agreement and $1.1 billion of 5.625% senior notes, net of debt issuance costs.
- The revolving facility was increased from $500 million to $640 million in May 2023. After $402.0 million of borrowings and $22.4 million of undrawn letters of credit, reported availability was $215.6 million.
- The Company reported a Total Leverage Ratio of 3.59 versus a maximum covenant level of 4.25 and stated that it was in compliance with its debt covenants.
- Management stated that existing cash, operating cash flows and available borrowing capacity are expected to fund operations and anticipated needs for the next twelve months and subsequent periods.
Material Changes and Unusual Items
- Q2 net loss attributable to common shareholders was $4.7 million versus income of $10.5 million in the prior-year quarter; the six-month result was a $4.3 million loss versus $23.1 million of income.
- Impairment and other losses were $10.6 million in Q2 and year-to-date, comprising $1.4 million for a discontinued trade name, $6.1 million for right-of-use lease assets and $3.1 million for related leasehold improvements.
- Operating results included $3.9 million of incremental stock-based compensation from modifying certain stock appreciation rights and an $8.5 million related liability at June 30, 2023.
- The Company recorded out-of-period tax adjustments of $5.3 million in Q2 and $7.4 million year-to-date to correct prior-period understatement of income tax expense. Management concluded the errors were not material to current or previously issued financial statements.
- Six-month share repurchases totaled $199.4 million, including $39.8 million under the repurchase program and approximately $150.0 million for 23.3 million shares purchased from affiliates of AlpInvest at $6.43 per share. Approximately $158.4 million remained available under the program at June 30.
- Stagwell acquired Huskies, Ltd. in April 2023 for approximately $5.6 million, including approximately $1.0 million of deferred consideration.
- Deferred acquisition consideration totaled $114.5 million at June 30, including approximately $31.2 million expected to be settled in Class A shares. Redeemable noncontrolling interests were $28.1 million.
Guidance, Outlook and Risks
The filing does not provide a clear quantitative revenue, earnings or Adjusted EBITDA guidance target. Management continues to describe the strategy as building, growing and acquiring market-leading businesses and expects to rely on operating cash flow, existing cash and available credit to fund operations and obligations.
- Management cited macroeconomic uncertainty, client budget reductions, client losses, inflation, interest rates, competition, employee retention, acquisitions and integration, foreign exchange and geopolitical events as significant business risks.
- Marketing and communications spending may be discretionary and sensitive to economic conditions. Communications Network results are also affected by election-cycle volatility.
- The Company remains exposed to working-capital demands and potential uncollectible client receivables relating to media and production commitments made on clients’ behalf.
- Contingent obligations include deferred acquisition consideration, potential purchases of noncontrolling interests, profits-interest awards, lease commitments, Tax Receivable Agreement payments and other contractual commitments.
- Internal control over financial reporting remained subject to previously disclosed material weaknesses. Management reported progress on remediation but stated that disclosure controls and procedures were not effective as of June 30, 2023; operating-effectiveness testing was still in process.
- The Company reported approximately $100.5 million of unsatisfied performance obligations for contracts longer than one year, expected to be recognized approximately 50% in 2023, 40% in 2024 and 10% in 2025.
Investor Verification Priorities
- Verify whether organic revenue trends, client retention and spending recover after the Q2 declines, particularly in Integrated Agencies and Communications.
- Monitor cash conversion and working-capital requirements, given $144.1 million of year-to-date operating cash outflow and the decline in cash balances.
- Reconcile debt balances, variable-rate exposure, leverage covenant headroom and available revolving-credit capacity.
- Assess the sustainability of share repurchases relative to liquidity, debt obligations and contingent acquisition payments.
- Evaluate recurring versus nonrecurring components of Adjusted EBITDA, including impairments, stock-based compensation, acquisition adjustments and other items.
- Track remediation of material weaknesses and any effect on the reliability or timeliness of future financial reporting.
- Review the timing and valuation of deferred acquisition consideration, redeemable noncontrolling interests and Tax Receivable Agreement obligations.