MDC Partners Inc. (MDCA) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the MDC Partners First Quarter Results Conference call. Please note this event is being recorded. I would now like to turn the conference over to Michaela Pewarski, Vice President of Investor Relations. Please go ahead.
Michaela Pewarski: Thank you, operator, and good morning, everyone. Welcome to the MDC Partners conference call for the first quarter of 2021. Joining me today are Mark Penn, Chairman and Chief Executive Officer; Frank Lanuto, Chief Financial Officer; David Ross, General Counsel; and Irwin Simon, Lead Independent Director of MDC’s Board of Directors and Chair of the Special Committee of Independent Members of the MDC Board.
Mark Penn: Thank you, Michaela. Good morning, and thank you for joining us. For today’s call, I will begin with a review of MDC’s Q1 performance amidst an improving macro environment. I will then turn the call over to Frank Lanuto to provide an update on our operating results and balance sheet. Following that, I’ll invite our Lead Independent Director of MDC’s Board of Directors and Chair of the Special Committee of Independent Members of the MDC Board, Irwin Simon, to say a few words on behalf of the Special Committee in relation to the combination with Stagwell. Separately, Stagwell released its first quarter results earlier today as well and will hold a call at 9:00 a.m. to review those results. Turning to MDC’s results for the quarter. I’m pleased to say we’re off to a solid start to the year and showed a faster-than-expected recovery from pandemic close while we held the line on expenses, driving record first quarter adjusted EBITDA of $52 million. Q1 2021 was our strongest first quarter adjusted EBITDA performance in MDC history growing 31% over the prior year, which was the previous record for the first quarter adjusted EBITDA. Adjusted EBITDA margins climbed to 16.9% from 12.1% in Q1 of last year, driven by the continued benefit of cost actions taken in 2019 and 2020. In addition, MDC reported its highest net income in nearly 3 years this quarter. We see a robust market for our services with demand picking up in many important economic sectors as we head into the historically active 2Q pitch season. Looking more closely at our top line performance Q1 revenue declined 6% to $308 million on a GAAP basis but was down only 1% year-over-year on a net revenue basis against strong pre-pandemic results a year ago. Organic revenue showed similar trends, down just 2% year-over-year despite lapping a quarter of industry-leading growth. As such, our organic net revenue 2-year comp stack is roughly flat, ranking towards the high end of the peer group.
Frank Lanuto: Thank you, Mark. Good morning, everyone. We started the year strong in 2021, delivering a solid performance in the first quarter as we continue to narrow the revenue declines from the pre-pandemic periods in the prior year and deliver the highest Q1 adjusted EBITDA in the company’s history and our highest net income in nearly 3 years. For the quarter, revenue declined 6.2% and to $308 million or 6.9% on an organic basis. Net revenue, excluding pass-through costs, declined 1.4% to $271 million, while organic net revenue declined 2.1%. The spread between GAAP and net revenue is largely attributable to our experiential business, which can have higher levels of pass-through costs. Looking at our revenue from a client sector standpoint, we saw growth this quarter in health care, consumer products and financials. Both technology and food and beverage further narrowed the revenue gap from 2020 levels, continuing their recovery trend. The auto and travel tourism sectors remained softer with lingering impacts from 2020. Our experiential division, which cuts across various industry sectors, continues to impact our GAAP revenue and accounts for approximately 70% of the revenue declined, although with a much smaller impact on net revenue, as previously mentioned. Partially offsetting these declines, our digital business continued to grow rapidly, up 60% for the quarter. Our recovery trend accelerated in Q1. The year-over-year quarterly revenue declines have narrowed each quarter from its peak of 28% in Q2 of 2020, declining to 17% in Q3, 14% in Q4 and down to 6% in Q1. The improving revenue trend has been broad-based as each of our reportable segments improved its year-over-year trend this quarter as compared to Q4 2020.
Irwin Simon: Thank you very much, Mark and Frank and team MDC and good quarter in these times. I wanted to take a moment to share an update on MDC Partners’ merger process with Stagwell Media. As you well have seen, we have filed several amendments to our S-4 as we’ve been working through the comment period with the SEC. We are hopeful that we are close to the end of that process, and we’ll be able to file our proxy statement prospectus in the coming days. I can tell you, our special committee worked tirelessly on behalf of MDC shareholders, sought the advice of financial advisers and negotiated over a long period of time to ensure MDC shareholders receive fair value for their shares in MDC. As you’ve heard, MDC’s Q1 results show that their efforts and diligence -- that our efforts and diligence were accurate. The Special Committee’s projection models predicted MDC’s performance, validating our belief that the combination is powerful, and most importantly, the exchange ratio is fair to our MDC shareholders. We’ve also watched the appreciation in value and the volume trading in MDC stock and believe that is due in part to the enthusiasm for the combination and the view of most shareholders that bringing the companies together will improve the balance sheet, create revenue growth, cash flow that will generate value for MDC shareholders as we move forward. The Special Committee is excited about this transaction, and I believe that all MDC shareholders should be as well. It rewards MDC shareholders for their investment in support of the company while, at the same time, providing MDC shareholders significant ownership in the combined company. MDC and Stagwell combined will have a better portfolio of agencies that are at the forefront, which is so important today, of innovation and marketing, offering the best creative digital technology and strategic communication solutions in the marketplace. Together, MDC and Stagwell agencies will be able to compete and win global client assignments with larger budgets, better margins afforded in the best-in-class advertising and marketing. We believe this merger on the terms agreed to is truly a win for MDC, a win for our clients, a win for our employees and as most importantly, a well-earned win for MDC shareholders. For MDC shareholders, the Special Committee and I believe this is a great combination. I know it’s taken a little time to get there, but patients is often rewarded, and we’re confident that this will be the case here. Thank you.
Michaela Pewarski: Thank you. Operator, please open it up for questions at this time.
Operator: Our first question will come from Tom White with D.A. Davidson.
Tom White: Mark, I guess I was hoping to maybe hear your view on whether the competitive landscape for MDC, and I guess, Stagwell also has maybe sort of evolved here over the course of the pandemic. Kind of what is the -- what does that landscape look like? Kind of is it significantly different now that we’re kind of emerging from the pandemic and you guys are getting a better sense? And also, I guess, related, have your views or appetite around maybe possible further M&A down the line changed at all once you combine the 2 companies? And then I had a quick follow-up.
Mark Penn: Look, I think the -- we’re beginning really to see companies, I think, go back to marketing, understand that there’s going to be a robust consumer marketplace by the by the end of the year. And so consequently, I think we saw some return, particularly on this long-term creative that takes months to scale. I think coming out of the pandemic, the principal change continues to be those who don’t have a digital stack have to increase their investment in the digital stack and the shift more and more to digital marketing, which, of course, is what the entire combination is about. My general view, though, of the competitive landscape really hasn’t changed in the sense that there are 4 big players who get $60 billion who haven’t been challenged at scale for decades here. And that as we build this combination up and we expand out into the global marketplace so that we compete on technology, we compete on creativity, and we have the full global coverage, we’ll be able to reach up and win those larger contracts away from those companies, which you see increasingly, the combination can do that in the United States as it combines, say, Code and Theory at J&J with Doner and you see those very substantial wins that previously had been occupied by the big 4. So principally, the market structure remains very much the same. And our M&A plan to focus on competing in the global market and advanced leading technologies, I think, is very much intact exactly as previously outlined.
Tom White: Okay. That’s helpful. And then you talked a little bit about the kind of some of the newer SaaS kind of marketing technology products. I guess as you look kind of, I don’t know 2, 3, 4 years out, once -- presuming that the merger goes through, how big a part of that combined business do you think these new products could represent? And are there any products in particular that you think have a potential to be -- I guess, what has the most potential to kind of be a needle mover, you think, kind of in the near term when you look at the pipeline of these products?
Mark Penn: Well, I think these -- digital products always tend to have, particularly as we’re selling B2B products, really tend to have a kind of a slow snowball. And then I outlined in the next 4 years, getting the revenue up to $75 million. As you kind of can’t -- I don’t think that’s -- I think that’s a conservative call if we get a hit. And I think we’re seeing rolling out, I think PRophet is on a very nice trend. We’ve gone from introduction to demos, to trials, to sales and deployment. And so I think that has significant opportunities in the PR space and doesn’t have a competitor that does exactly what it does, use AI to predict how stories will be covered. We’ve taken Koalifyed, which we which we did with P&G. And Koalifyed is an influencer marketing platform, and I think that has very solid potential. Our -- The Harris Poll terminal has a -- is probably showing the strongest run rate and went up, I think, 300% in the last couple of months, and it’s also seen kind of trial, introduction, purchase and then use. And I think the biggest product of all is going to be the product of consumer understanding and engagement, which brings together all our data from the polling with first-party or third-party data to create audiences without cookies. That has the potential to be $1 million a year of sales. So I think we have 4 in the hunt really already, right, that are going to be in the sales process this year or now or going into the next year. So I think it’s a reasonable estimate. I’d hope to beat it if we have a hit. And of course, the value of any product like this that is primarily driven by SaaS revenue has an incredibly high value and could be spun-off to create more value to shareholders.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mark Penn, Chairman and CEO, for any closing remarks.
Mark Penn: Thank you all for joining us today. Just to note, we’ll be attending a few investor conferences in May. So look for us at the Needham Technology and Media Conference on May 18, the Sidoti Investor Conference on May 19 and the JPMorgan Technology, Media and Communications Conference on May 26. Thank you again.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
