Stagwell Inc. Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Stagwell provides marketing and business solutions through networks and brands spanning digital transformation, creativity and communications, performance media and data, and consumer insights and strategy. The filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $622.4 million | $642.9 million | Down 3.2% |
| Net revenue | $521.7 million | $526.6 million | Down 0.9% |
| Operating income | $16.2 million | $54.7 million | Down 70.3% |
| Operating margin | 2.6% | 8.5% | Down 5.9 percentage points |
| Adjusted EBITDA | $72.2 million | $101.4 million | Down 28.8% |
| Adjusted EBITDA margin | 11.6% | 15.8% | Down 4.2 percentage points |
| Net income attributable to Stagwell shareholders | $0.4 million | $12.7 million | Down 96.5% |
| Diluted EPS | $(0.01) | $0.10 | Declined |
| Operating cash flow | $(85.1) million | $(48.6) million | Use increased $36.5 million |
Net loss was $5.0 million, compared with net income of $33.6 million in the prior-year quarter. The company recorded $2.4 million of income tax expense despite a $2.4 million pretax loss, producing a reported effective tax rate of negative 99.1%, primarily due to the pretax loss, increased valuation allowance, and uncertain tax positions.
Cash and cash equivalents were $138.5 million at March 31, 2023, compared with $220.6 million at December 31, 2022. Net cash used in investing activities was $10.8 million, including $3.4 million of capital expenditures and $6.7 million of capitalized software. Net cash provided by financing activities was $12.9 million, including $50.0 million of net revolving-credit borrowings, offset by $26.2 million of share repurchases and $10.9 million of distributions to noncontrolling interests.
Total debt, net of issuance costs, was $1.235 billion, compared with $1.185 billion at year-end 2022. This included $1.1 billion of 5.625% senior notes due 2029 and $150.0 million outstanding under the revolving credit facility. As of March 31, 2023, $325.4 million was available under the $500.0 million facility after outstanding borrowings and undrawn letters of credit. The company reported a total leverage ratio of 2.79 versus a covenant maximum of 4.25 and stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Organic net revenue declined 3.1%, primarily due to lower existing-client spending and reduced advocacy activity compared with elevated election-related spending in Q1 2022. Foreign exchange reduced net revenue by $7.3 million, while net acquisitions increased it by $18.5 million.
- Integrated Agencies Network revenue declined 5.4% and Adjusted EBITDA declined 13.8%, with technology-sector clients withholding spending and expenses increasing.
- Brand Performance Network revenue increased 7.9%, supported by new and expanded clients and the Brand New Galaxy acquisition, but Adjusted EBITDA declined 25.0% due to higher billable, staff, and administrative costs.
- Communications Network revenue declined 28.7%, primarily from lower advocacy services following the 2022 elections. Its Adjusted EBITDA declined 75.6%, and the segment reported a $0.4 million operating loss versus $13.0 million of operating income.
- Office and general expenses increased 9.9%, depreciation and amortization increased 7.3%, and stock-based compensation increased 49.7% to $12.0 million. The company also recorded a $4.1 million adjustment to deferred acquisition consideration.
- Accounts receivable increased to $659.1 million from $645.8 million at year-end, while accrued media increased to $283.6 million from $240.5 million. The company transferred $82.0 million of receivables to third parties during the quarter, compared with $7.5 million in Q1 2022.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management expects cash from operations, existing cash, and available credit to fund anticipated needs for the next twelve months and subsequent periods, but notes that liquidity depends on future operating performance, economic conditions, competition, covenant compliance, and access to financing.
On May 4, 2023, the company amended its credit agreement to add $140.0 million of revolving commitments, increasing the borrowing limit from $500.0 million to $640.0 million. The amendment also permitted up to $150.0 million of specified share repurchases or redemptions and addressed investments and financing related to certain software-as-a-service and data-as-a-service businesses.
On May 9, 2023, Stagwell agreed to repurchase approximately 23.3 million shares from AlpInvest Partners for approximately $150.0 million, or $6.43 per share. Stagwell Media LP and AlpInvest were also negotiating the redemption of AlpInvest’s remaining interests in Stagwell Media LP, subject to final documentation.
The company continued to report material weaknesses in internal control over financial reporting. Management concluded that disclosure controls and procedures were not effective as of March 31, 2023, although remediation activities continued, including additional SOX resources, control redesign, enhanced management review controls, and finance-system transformation.
An out-of-period adjustment reduced noncontrolling interests and accumulated other comprehensive loss by approximately $24.0 million, with no effect on total shareholders’ equity or net income. Management concluded that the error was not material to the current or previously issued financial statements. The company also adopted the current expected credit loss model, reducing opening retained earnings by $2.1 million.
Key risks include client spending reductions, economic weakness, inflation and interest rates, employee retention, acquisitions and integration, debt and contingent acquisition obligations, tax liabilities, cybersecurity, foreign currency movements, geopolitical events, potential impairment, and the unresolved material weaknesses in internal controls. The company had $32.5 million of redeemable noncontrolling interests, $165.7 million of deferred acquisition consideration, $24.6 million of undrawn letters of credit, and approximately $90.8 million of unsatisfied performance obligations at March 31, 2023.
Important Facts for Investors to Verify
- Whether organic revenue and client spending stabilize, particularly in the Integrated Agencies and Communications Networks.
- Whether margin pressure from compensation, administrative expenses, deferred acquisition consideration, and acquired intangible amortization moderates.
- Operating cash conversion, working-capital requirements, and the sustainability of receivables-transfer arrangements.
- Debt levels, variable-rate exposure, covenant compliance, and the practical availability of the expanded revolving facility.
- The funding and timing of the $150.0 million AlpInvest share repurchase and related redemption negotiations.
- Progress toward remediation and auditor validation of the reported material weaknesses in internal controls.
- Future cash requirements for deferred acquisition consideration, redeemable noncontrolling interests, leases, tax receivables agreement payments, and other commitments.