Stagwell (STGW) - 2024 Q2 - Quarterly Report

FORM 10-Q Filing Information General Information Stagwell Inc. filed its Quarterly Report on Form 10-Q for the period ended June 30, 2024, with Class A and Class C Common Stock traded on NASDAQ - Stagwell Inc. filed its Quarterly Report on Form 10-Q for the period ended June 30, 2024[2] - The company is classified as an Accelerated Filer[3] - | Class of Stock | Shares Outstanding (as of July 25, 2024) |\n| :--------------- | :--------------------------------------- |\n| Class A Common | 111,731,103 |\n| Class C Common | 151,648,741 | EXPLANATORY NOTE Forward-Looking Statements This section contains forward-looking statements about the Company's future performance and prospects, subject to risks and uncertainties, with no obligation for public updates - The document contains forward-looking statements about the Company's beliefs, expectations, future financial prospects, strategy, business and economic trends, growth, technological leadership, and completed acquisitions[5] - Forward-looking statements are subject to change based on various factors, including general business, economic, and market conditions, competitive environment, and unanticipated costs[5] - The Company does not undertake any obligation to publicly update forward-looking statements in light of new information or future events[5] Risk Factors The Company identifies inherent risks including economic conditions, client and employee retention, competition, debt, acquisitions, and technological developments, advising investors to review the 2023 Form 10-K - Risks associated with international, national, and regional unfavorable economic conditions affecting clients - Demand for the Company's services, which may precipitate or exacerbate other risks - Inflation and actions taken by central banks to counter inflation - Ability to attract new clients and retain existing clients - Impact of reduced client spending and changes in client advertising, marketing, and corporate communications requirements - Financial failure of the Company's clients - Ability to retain and attract key employees - Ability to compete in the markets in which it operates - Ability to achieve cost-saving initiatives - Implementation of strategic initiatives - Ability to remain in compliance with debt agreements and finance contingent payment obligations - Ability to manage growth effectively - Ability to identify, complete, and integrate acquisitions and realize anticipated benefits - Ability to identify and complete divestitures and achieve anticipated benefits - Ability to develop products incorporating new technologies, including artificial intelligence, augmented reality, and virtual reality, and realize benefits from such products - Adverse tax consequences, including future changes in tax laws and disagreements with tax authorities - Unremediated material weaknesses in internal control over financial reporting - Ability to accurately forecast future financial performance and provide accurate guidance - Ability to protect client data from security incidents or cyberattacks - Economic disruptions from war and geopolitical tensions (e.g., Russia/Ukraine, Israel/Gaza), terrorist activities, and natural disasters - Stock price volatility - Foreign currency fluctuations - Investors should carefully consider these risks and additional risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2023[6] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Stagwell Inc.'s unaudited consolidated financial statements, including statements of operations, comprehensive income, balance sheets, cash flows, and shareholders' equity, along with detailed explanatory notes Unaudited Consolidated Statements of Operations The Statements of Operations show a net loss attributable to common shareholders of $3.0 million (3M) and $4.2 million (6M) for June 30, 2024, with increased revenue and operating income - | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- |\n| Revenue | $671,168 | $632,265 | $1,341,227 | $1,254,709 |\n| Operating Income | $21,907 | $21,262 | $47,761 | $37,495 |\n| Net Loss Attributable to Stagwell Inc. Common Shareholders | $(2,965) | $(3,194) | $(4,247) | $(1,805) |\n| Basic EPS | $(0.03) | $(0.03) | $(0.04) | $(0.01) |\n| Diluted EPS | $(0.03) | $(0.03) | $(0.04) | $(0.01) | Unaudited Consolidated Statements of Comprehensive Income (Loss) The Statements of Comprehensive Income (Loss) report a comprehensive loss attributable to common shareholders of $5.0 million (3M) and $9.1 million (6M) for June 30, 2024, including foreign currency adjustments - | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- |\n| Net Loss | $(3,954) | $(4,965) | $(4,667) | $(7,834) |\n| Other Comprehensive Income (Loss) - Foreign Currency Translation Adjustment | $(5,479) | $2,945 | $(12,625) | $7,392 |\n| Comprehensive Loss for the Period | $(9,433) | $(2,020) | $(17,292) | $(442) |\n| Comprehensive Income (Loss) Attributable to Stagwell Inc. Common Shareholders | $(4,964) | $(3,178) | $(9,110) | $436 | Unaudited Consolidated Balance Sheets The Balance Sheets indicate a slight increase in total assets to $3.79 billion and total liabilities to $3.05 billion, with a decrease in total shareholders' equity to $730 million as of June 30, 2024 - | Metric (in thousands) | June 30, 2024 | December 31, 2023 |\n| :-------------------- | :------------ | :---------------- |\n| Total Current Assets | $1,100,409 | $1,025,066 |\n| Goodwill | $1,504,650 | $1,498,815 |\n| Total Assets | $3,792,680 | $3,767,047 |\n| Total Current Liabilities | $1,221,588 | $1,374,329 |\n| Long-term Debt | $1,422,226 | $1,145,828 |\n| Total Liabilities | $3,051,649 | $2,930,983 |\n| Total Shareholders' Equity | $729,924 | $825,272 | Unaudited Consolidated Statements of Cash Flows For the six months ended June 30, 2024, the Company reported $67.6 million net cash used in operations, $52.2 million used in investing, and $138.3 million provided by financing, leading to a net increase in cash - | Metric (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :-------------------- | :----------------------------- | :----------------------------- |\n| Net Cash Used in Operating Activities | $(67,618) | $(144,146) |\n| Net Cash Used in Investing Activities | $(52,183) | $(30,118) |\n| Net Cash Provided by Financing Activities | $138,304 | $58,521 |\n| Net Increase (Decrease) in Cash and Cash Equivalents | $16,341 | $(115,305) |\n| Cash and Cash Equivalents at End of Period | $136,078 | $105,284 | Unaudited Consolidated Statements of Shareholders' Equity The Statements of Shareholders' Equity detail changes in common shares, paid-in capital, retained earnings, and comprehensive loss, reflecting net losses, distributions, share repurchases, and stock-based compensation - | Metric (in thousands) | Balance at Dec 31, 2023 | Net Loss | Other Comprehensive Loss | Distributions to Noncontrolling Interests | Purchases of Noncontrolling Interest | Shares Repurchased and Cancelled | Stock-based Compensation | Shares Issued, Acquisitions | Balance at June 30, 2024 |\n| :-------------------- | :---------------------- | :------- | :----------------------- | :---------------------------------------- | :----------------------------------- | :------------------------------- | :----------------------- | :-------------------------- | :----------------------- |\n| Stagwell Inc. Shareholders' Equity | $356,695 | $(4,247) | $(4,863) | $0 | $(3,069) | $(87,275) | $19,008 | $25,404 | $291,570 |\n| Noncontrolling Interests | $468,577 | $(420) | $(7,762) | $(21,074) | $(10,226) | $0 | $0 | $0 | $438,354 |\n| Total Shareholders' Equity | $825,272 | $(4,667) | $(12,625) | $(21,074) | $(13,295) | $(87,275) | $19,008 | $25,404 | $729,924 | Notes to the Unaudited Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, covering business, accounting policies, acquisitions, revenue, EPS, debt, equity, and other key financial disclosures 1. Business and Basis of Presentation Stagwell Inc. provides marketing and business solutions, with financial statements prepared under GAAP and SEC rules, and has revised prior 2023 statements due to errors in income taxes and noncontrolling interests - Stagwell's strategy is to build, grow, and acquire market-leading businesses that deliver modern marketing services[28] - The Company identified and corrected errors in its previously filed 2022 and 2023 financial statements related to income taxes, noncontrolling interests, and accumulated other comprehensive loss[29][30][31][32][33] - On July 19, 2024, Stagwell acquired L.D.R.S. Group Ltd. ('Leaders') for $3.8 million, with contingent consideration up to $6.6 million[34] 2. New Accounting Pronouncements The Company is evaluating the impact of new FASB ASUs 2023-09 (Income Taxes) and 2023-07 (Segment Reporting) on its financial statements and disclosures - ASU 2023-09 (Income Taxes) is effective for annual periods beginning after December 15, 2024, requiring enhanced disaggregated income tax disclosures[35] - ASU 2023-07 (Segment Reporting) is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, improving segment expense disclosures[35] - The Company is evaluating the impact of both ASUs on its financial statements and disclosures[35] 3. Acquisitions Stagwell completed several acquisitions in 2024 and 2023, including Team Epiphany and PROS Agency, totaling approximately $35.8 million in initial consideration, contributing to goodwill and intangible assets - 2024 Acquisitions: - Team Epiphany (Jan 2, 2024): Acquired for $15.8 million ($10.8 million cash, $5.0 million Class A Common Stock), with contingent consideration up to $17.0 million. Goodwill of $7.2 million assigned to Integrated Agencies Network[36] - PROS Agency (Apr 5, 2024): Acquired for ~$9 million ($5 million cash, $1 million Class A Common Stock, $3 million contingent consideration), with additional contingent consideration up to ~$14 million. Goodwill of $5.5 million assigned to Communications Network[37] - What's Next Partners (Apr 4, 2024): Acquired for ~$5 million in cash, with contingent consideration up to ~$9 million. Goodwill of $5.4 million assigned to Integrated Agencies Network[38] - Sidekick Live Limited (Mar 1, 2024): Acquired for ~$6 million ($5 million cash, $0.2 million payable, $1 million Class A Common Stock), with contingent consideration up to ~$10 million. Goodwill of $2.0 million assigned to Communications Network[39] - 2023 Acquisitions: - Movers and Shakers LLC (Nov 1, 2023): Acquired for $14.7 million ($10.2 million cash, $4.5 million Class A Common Stock), with contingent consideration up to $35.0 million. Goodwill of $8.2 million assigned to Integrated Agencies Network[40] - Left Field Labs LLC (Oct 2, 2023): Acquired for $13.2 million ($9.4 million cash, $3.8 million Class A Common Stock), with contingent consideration up to $51.0 million. Goodwill of $7.9 million assigned to Integrated Agencies Network[42] - Tinsel Experiential Design LLC (Jul 3, 2023): Acquired for $2.5 million in cash, with contingent consideration. Goodwill of $1.6 million assigned to Integrated Agencies Network[42] - Huskies, Ltd. (Apr 25, 2023): Acquired for ~$6 million in cash, with $0.9 million deferred. Goodwill of $2.6 million assigned to Brand Performance Network[43] - The excess of purchase consideration over net assets acquired is recorded as goodwill, primarily attributable to assembled workforce and expected growth[36][40][42][43] - On October 31, 2023, the Company sold ConcentricLife for $245.0 million in cash, resulting in a pre-tax gain of $94.5 million[44] 4. Revenue Stagwell's revenue, disaggregated by capabilities and geography, totaled $671.2 million for the three months ended June 30, 2024, with the United States as the largest market, and details on contract assets and liabilities - | Principal Capabilities (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- |\n| Digital Transformation | $163,472 | $160,067 | $359,235 | $345,582 |\n| Creativity and Communications | $316,761 | $291,290 | $608,414 | $555,172 |\n| Performance Media and Data | $78,411 | $74,975 | $155,427 | $142,949 |\n| Consumer Insights and Strategy | $47,717 | $48,765 | $93,486 | $98,020 |\n| Stagwell Marketing Cloud Group | $64,807 | $57,168 | $124,665 | $112,986 |\n| Total Revenue | $671,168 | $632,265 | $1,341,227 | $1,254,709 | - | Geographical Location (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- |\n| United States | $551,080 | $513,265 | $1,114,730 | $1,031,033 |\n| United Kingdom | $40,515 | $42,805 | $78,276 | $75,212 |\n| Other | $79,573 | $76,195 | $148,221 | $148,464 |\n| Total Revenue | $671,168 | $632,265 | $1,341,227 | $1,254,709 | - Contract assets (fees and reimbursable costs not yet invoiced) were $181.7 million as of June 30, 2024, up from $141.9 million at December 31, 2023[49] - Advance billings (contract liabilities) were $320.5 million as of June 30, 2024, up from $301.7 million at December 31, 2023[49] - The change in Advance billings for the six months ended June 30, 2024, was primarily driven by $245.0 million of recognized revenue from prior balances, third-party costs, and cash payments received in advance[51] - Unsatisfied performance obligations for contracts over one year totaled $88.2 million as of June 30, 2024, with 58% expected to be recognized in 2024[51] 5. Earnings (Loss) Per Share The Company reported basic and diluted loss per common share of $(0.03) (3M) and $(0.04) (6M) for June 30, 2024, excluding anti-dilutive Class C Shares and stock awards - | Metric (in thousands, except per share) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 |\n| :-------------------------------------- | :------------------------------- | :----------------------------- |\n| Net Loss Attributable to Stagwell Inc. Common Shareholders | $(2,965) | $(4,247) |\n| Weighted Average Number of Common Shares Outstanding | 113,484 | 113,059 |\n| Basic EPS | $(0.03) | $(0.04) |\n| Diluted EPS | $(0.03) | $(0.04) | - Anti-dilutive shares for the three months ended June 30, 2024, included 151,649 Class C Shares, 4,177 Stock Appreciation Rights and Restricted Awards, and 2,810 Class A Shares to settle deferred acquisition obligations[53] - Anti-dilutive shares for the six months ended June 30, 2024, included 151,649 Class C Shares, 3,641 Stock Appreciation Rights and Restricted Awards, and 2,851 Class A Shares to settle deferred acquisition obligations[53] 6. Deferred Acquisition Consideration Deferred acquisition consideration decreased from $101.1 million (Dec 31, 2023) to $71.0 million (June 30, 2024), primarily due to payments, partially offset by adjustments and new acquisitions - | Metric (in thousands) | June 30, 2024 | December 31, 2023 |\n| :-------------------- | :------------ | :---------------- |\n| Beginning Balance | $101,058 | $161,323 |\n| Payments | $(45,028) | $(97,447) |\n| Adjustments | $11,244 | $14,303 |\n| Additions | $4,220 | $22,172 |\n| Ending Balance | $71,041 | $101,058 | - Payments included $18.2 million settled in Class A Common Stock for the six months ended June 30, 2024[58] - Contingent deferred acquisition consideration was $69.5 million and fixed was $1.5 million as of June 30, 2024[59] - Approximately $16.4 million of deferred acquisition consideration as of June 30, 2024, is expected to be settled in Class A Common Stock[59] 7. Leases The Company's operating lease costs totaled $47.1 million for the six months ended June 30, 2024, with a 6.1-year weighted average lease term and a $1.7 million impairment charge for lease assets - | Lease Cost (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- |\n| Operating Lease Cost | $18,702 | $18,950 | $39,648 | $38,528 |\n| Variable Lease Cost | $5,889 | $5,657 | $11,826 | $10,218 |\n| Sublease Rental Income | $(1,935) | $(2,564) | $(4,415) | $(5,616) |\n| Total Lease Cost | $22,656 | $22,043 | $47,059 | $43,130 | - Weighted average remaining lease term: 6.1 years as of June 30, 2024[63] - Weighted average discount rate: 5.6% as of June 30, 2024[63] - Impairment charge of $1.7 million recognized in the six months ended June 30, 2024, for right-of-use lease assets and leasehold improvements[65] - Minimum future rental payments under leases total $390.1 million, with a lease liability of $326.7 million after discounting, as of June 30, 2024[66] 8. Debt Stagwell's total long-term debt increased to $1.42 billion as of June 30, 2024, including $334.0 million under its Credit Agreement and $1.1 billion in Senior Notes, with the Company in compliance with all debt covenants - | Debt Component (in thousands) | June 30, 2024 | December 31, 2023 |\n| :---------------------------- | :------------ | :---------------- |\n| Credit Agreement | $334,000 | $59,000 |\n| 5.625% Notes | $1,100,000 | $1,100,000 |\n| Debt Issuance Costs | $(11,774) | $(13,172) |\n| Total Long-Term Debt | $1,422,226| $1,145,828 | - Interest expense, net, for the six months ended June 30, 2024, was $43.5 million, up from $40.6 million in the prior year[66] - The Credit Agreement provides revolving commitments of up to $640.0 million, with $290.5 million unused as of June 30, 2024[67] - The Company was in compliance with all covenants of the Credit Agreement and 5.625% Notes as of June 30, 2024[68] 9. Noncontrolling and Redeemable Noncontrolling Interests Net loss attributable to noncontrolling interests was $(1.0) million (3M) and $(0.4) million (6M) for June 30, 2024, with total noncontrolling interests decreasing to $438.4 million - | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |\n| :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- |\n| Net Loss Attributable to Noncontrolling and Redeemable Noncontrolling Interests | $(989) | $(1,771) | $(420) | $(6,029) | - | Noncontrolling Interests (in thousands) | June 30, 2024 | December 31, 2023 |\n| :-------------------------------------- | :------------ | :---------------- |\n| Noncontrolling Interest of Class C Shareholders | $416,814 | $436,215 |\n| Noncontrolling Interest of Other Equity Interest Holders | $21,540 | $32,362 |\n| Total Noncontrolling Interests | $438,354 | $468,577 | - Redeemable noncontrolling interests increased slightly to $11.1 million as of June 30, 2024, from $10.8 million at December 31, 2023[74] - Comprehensive loss attributable to noncontrolling and redeemable noncontrolling interests was $(4.5) million for the three months and $(8.2) million for the six months ended June 30, 2024[75] 10. Commitments, Contingencies, and Guarantees The Company faces legal proceedings without expected material adverse effects, holding $15.5 million in undrawn letters of credit and $129.7 million in future minimum commitments for 2024 and beyond - The Company does not expect legal proceedings or regulatory inquiries to have a material adverse effect on its financial condition or results of operations[76] - Undrawn letters of credit outstanding: $15.5 million as of June 30, 2024[76] - Future minimum commitments under non-cancellable contracts with partner associations: $6.0 million for remainder of 2024, and $23.3 million for 2025 and thereafter[78] - Future minimum commitments under cloud services vendor contract: $5.3 million for remainder of 2024, and $53.9 million for 2025 and thereafter[78] 11. Share Capital Stagwell Inc. has 1.0 billion authorized Class A shares (112.0 million outstanding) and 250.0 million authorized Class C shares (151.6 million outstanding), repurchasing 11.8 million Class A shares for $73.7 million during the six months ended June 30, 2024 - Class A Common Stock: 1.0 billion shares authorized, 112.0 million issued and outstanding as of June 30, 2024. Each share carries one vote and economic interest[80] - Class C Common Stock: 250.0 million shares authorized, 151.6 million issued and outstanding as of June 30, 2024. Each share carries one vote but no economic interest, and is paired with an OpCo common unit, exchangeable for Class A shares on a one-to-one basis[81] - The Company repurchased 11.8 million shares of Class A Common Stock for an aggregate value of $73.7 million during the six months ended June 30, 2024, under its $250.0 million Repurchase Program[82] - As of June 30, 2024, $64.8 million remained available under the Repurchase Program[82] 12. Fair Value Measurements The Company uses a three-level hierarchy for fair value measurements, classifying its $1.02 billion 5.625% Notes as Level 2 and contingent deferred acquisition consideration as Level 3, based on future performance assumptions - Level 1: Quoted prices in active markets - Level 2: Observable prices corroborated by market data (e.g., 5.625% Notes) - Level 3: Unobservable inputs (e.g., contingent deferred acquisition consideration) - | Financial Instrument | Carrying Amount (June 30, 2024) | Fair Value (June 30, 2024) |\n| :------------------- | :------------------------------ | :------------------------- |\n| 5.625% Notes | $1,100,000 | $1,017,500 | - Contingent deferred acquisition consideration (Level 3) is measured based on models of future business performance, with discount rates ranging from 8.6% to 9.9% as of June 30, 2024[89] 13. Supplemental Information Stock-based compensation was $19.1 million for the six months ended June 30, 2024, with a $11.8 million liability for profits interests awards, and $141.7 million in trade receivables transferred to third parties - | Metric (in thousands) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 |\n| :-------------------- | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- |\n| Stock-based Compensation (Employee Incentive Plans) | $6,300 | $19,100 | $12,000 | $19,400 | - Liability for profits interests awards: $11.8 million as of June 30, 2024 (vs. $20.3 million at Dec 31, 2023)[92] - Change in fair value of profits interests awards resulted in a decrease in stock-based compensation of $2.7 million for the three months and $1.0 million for the six months ended June 30, 2024[92] - Trade receivables transferred to third parties: $141.7 million for the six months ended June 30, 2024 (vs. $101.6 million in 2023)[93] - Fees for receivable transfer arrangements: $1.9 million for the six months ended June 30, 2024 (vs. $1.8 million in 2023)[93] 14. Income Taxes Stagwell reported income tax expense of $1.2 million (3M) and $3.8 million (6M) on pre-tax losses for June 30, 2024, with effective tax rates of (41.8%) and (263.3%), respectively, and is evaluating the OECD's Pillar 2 impact - | Metric (in thousands) | Three Months Ended June 30, 2024 | Effective Tax Rate (3M) | Six Months Ended June 30, 2024 | Effective Tax Rate (6M) |\n| :-------------------- | :------------------------------- | :---------------------- | :----------------------------- | :---------------------- |\n| Pre-tax Loss | $(2,788) | | $(1,424) | |\n| Income Tax Expense | $1,165 | (41.8)% | $3,750 | (263.3)% | - The effective tax rate difference is primarily due to increased current losses subject to valuation allowance, reduced tax benefits from disregarded entity structure, and changes in tax benefits for share-based compensation and lease impairments[94][95] - The Company is evaluating the potential consequences of the OECD's Pillar 2 global minimum tax, expecting insignificant tax expenses in 2024[96] - TRA liability recorded at $26.7 million, with an associated deferred tax asset of $29.0 million, as of June 30, 2024[98] 15. Related Party Transactions Stagwell engages in related party transactions, generating $3.7 million in revenue and having $11.7 million due from related parties for the six months ended June 30, 2024, including loan receivables from employees - | Services (in thousands) | Total Transaction Value | Revenue (6 Months Ended June 30, 2024) | Due From Related Party (June 30, 2024) |\n| :---------------------- | :---------------------- | :------------------------------------- | :------------------------------------- |\n| Marketing & Advertising | $455 | $0 | $0 |\n| Marketing & Advertising | $3,576 | $941 | $2,989 |\n| Marketing & Website Dev | $2,657 | $1,269 | $385 |\n| Polling Services | $1,986 | $823 | $285 |\n| Polling & PR Services | $1,309 | $298 | $83 |\n| Marketing & Advertising | $18,000 | $341 | $8,000 |\n| Total | | $3,672 | $11,742 | - Loan receivable from a related party (minority interest holder in a Brand): $0.4 million as of June 30, 2024[99] - Loans to three employees of a subsidiary for noncontrolling interest purchase: $2.7 million due as of June 30, 2024[100] 16. Segment Information Stagwell operates through Integrated Agencies, Brand Performance, and Communications Networks, with Adjusted EBITDA as the key performance metric, showing significant growth in the Communications Network for the six months ended June 30, 2024 - Stagwell's Chief Operating Decision Maker (CODM) is Mark Penn, CEO and Chairman, who uses Adjusted EBITDA to evaluate segment performance[101] - Integrated Agencies Network: Includes Anomaly Alliance, Constellation, Doner Partner Network, Code and Theory, and National Research Group. Offers Digital Transformation, Performance Media & Data, Consumer Insights & Strategy, Stagwell Marketing Cloud Group, and Creativity & Communications[103] - Brand Performance Network (BPN): Comprised of a single operating segment focused on unified media and data management, omnichannel media placement, and creative media consulting[104] - Communications Network: Specialist network providing advocacy, strategic corporate communications, investor relations, public relations, and online fundraising services[104] - All Other: Includes the digital innovation group and Stagwell Marketing Cloud Group (Maru, Epicenter, ARound, PRophet, SmartAssets)[104] - Corporate: Centralized corporate office expenses not fully allocated to operating segments[104] - | Segment (in thousands) | Revenue (6 Months Ended June 30, 2024) | Adjusted EBITDA (6 Months Ended June 30, 2024) |\n| :--------------------- | :------------------------------------- | :--------------------------------------------- |\n| Integrated Agencies Network | $737,852 | $128,103 |\n| Brand Performance Network | $391,207 | $45,200 |\n| Communications Network | $199,316 | $41,557 |\n| All Other | $12,852 | $(7,135) |\n| Corporate | $0 | $(31,306) |\n| Total | $1,341,227 | $176,419 | 17. Revision of previously issued Unaudited Consolidated Financial Statements for the second quarter of 2023 The Company revised its Q2 2023 unaudited consolidated financial statements to correct errors in income taxes, noncontrolling interests, and comprehensive loss, without impacting cash flows from operating, investing, or financing activities - Revisions were made to correct errors in income taxes, noncontrolling interests, and accumulated other comprehensive loss in the previously issued Q2 2023 financial statements[107] - | Metric (in thousands) | As Reported (3M Ended June 30, 2023) | Adjustment (3M Ended June 30, 2023) | As Revised (3M Ended June 30, 2023) |\n| :-------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- |\n| Income Tax Expense | $5,717 | $(5,280) | $437 |\n| Net Loss | $(10,245) | $5,280 | $(4,965) |\n| Net Loss Attributable to Stagwell Inc. Common Shareholders | $(4,693) | $1,499 | $(3,194) |\n| Basic EPS | $(0.04) | $0.01 | $(0.03) |\n| Diluted EPS | $(0.04) | $0.01 | $(0.03) | - No changes were made to previously issued cash flows from operating, investing, or financing activities[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's discussion and analysis of Stagwell's financial condition and results for the three and six months ended June 30, 2024, covering consolidated and segment performance, liquidity, and critical accounting estimates Executive Summary Stagwell's strategy combines data and creativity for modern marketing solutions, using KPIs like revenue growth and non-GAAP measures such as Adjusted EBITDA, with recent developments including the Leaders acquisition and prior financial statement revisions - Stagwell's strategy is to build, grow, and acquire market-leading businesses that deliver modern marketing services by combining data and creativity[112] - Key performance indicators monitored include revenue, operating expenses, capital expenditures, and non-GAAP measures[112][118][120] - Revenue growth is analyzed by geographic location, existing/new clients, principal capability, currency changes, and acquisitions[112] - Non-GAAP financial measures include 'net revenue,' 'organic net revenue growth (decline),' 'Adjusted EBITDA,' and 'Adjusted Diluted EPS'[118][120] - The Company acquired L.D.R.S. Group Ltd. ('Leaders') on July 19, 2024, for $3.8 million, with contingent consideration up to $6.6 million[115] THREE MONTHS ENDED JUNE 30, 2024 COMPARED TO THREE MONTHS ENDED JUNE 30, 2023 For Q2 2024, Stagwell reported 6.2% revenue growth to $671.2 million, 3.0% operating income increase to $21.9 million, and a 5.6% Adjusted EBITDA decrease to $86.1 million, with 1.2% organic net revenue growth Consolidated Results of Operations Consolidated revenue for Q2 2024 increased 6.2% to $671.2 million, operating income rose 3.0% to $21.9 million, while Adjusted EBITDA decreased 5.6% to $86.1 million - | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $671,168 | $632,265 | $38,903 | 6.2% |\n| Net Revenue | $554,392 | $544,861 | $9,531 | 1.7% |\n| Operating Income | $21,907 | $21,262 | $645 | 3.0% |\n| Net Loss Attributable to Stagwell Inc. Common Shareholders | $(2,965) | $(3,194) | $229 | (7.2)% |\n| Adjusted EBITDA | $86,103 | $91,168 | $(5,065) | (5.6)% | - Organic net revenue increased by $6.6 million (1.2%), driven by new wins in consumer products and increased revenue in communications and public affairs sectors[126][129] - Net acquisitions (divestitures) increased net revenue by $4.0 million, primarily due to acquisitions of Team Epiphany, Movers and Shakers, and Left Field Labs, partially offset by the sale of ConcentricLife[126][129] - Stock-based compensation decreased by $4.7 million (44.3%) due to reversal of expense for performance awards not probable of being met[131] - Deferred acquisition consideration increased by $6.8 million due to recent acquisitions and fair value changes[133] - Impairment and other losses decreased by $10.3 million (98.0%) as the prior year included significant lease asset impairments[133] - | EPS Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 |\n| :--------- | :--------------------------- | :--------------------------- |\n| Diluted EPS | $(0.03) | $(0.03) |\n| Adjusted Diluted EPS | $0.14 | $0.18 | Integrated Agencies Network The Integrated Agencies Network's Q2 2024 revenue increased 5.3% to $385.1 million, with flat operating income and a 9.5% Adjusted EBITDA decrease to $68.0 million, despite 0.1% organic net revenue growth - | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $385,133 | $365,635 | $19,498 | 5.3% |\n| Net Revenue | $321,870 | $320,146 | $1,724 | 0.5% |\n| Operating Income | $37,114 | $37,111 | $3 | 0.0% |\n| Adjusted EBITDA | $67,995 | $75,106 | $(7,111) | (9.5)% | - Organic net revenue increased by 0.1% ($0.3 million), driven by new client wins and increased spending in consumer products, retail, technology, and communications sectors[153][154][155] - Net acquisitions (divestitures) increased net revenue by $1.9 million, primarily from acquisitions of Epiphany, Movers and Shakers, and Left Field Labs, partially offset by the sale of Concentric[153][154][155] - Stock-based compensation increased by $3.7 million due to fair value increase of deferred acquisition consideration arrangements[153][154][155] - Impairment and other losses decreased by $10.6 million (100%) as the prior year included significant lease asset impairments[153][154][155] Brand Performance Network The Brand Performance Network's Q2 2024 revenue grew 0.3% to $177.2 million, but operating income decreased 99.9% to $0.0 million, and Adjusted EBITDA declined 13.5% to $17.7 million, despite 1.5% organic net revenue growth - | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $177,245 | $176,733 | $512 | 0.3% |\n| Net Revenue | $157,108 | $154,470 | $2,638 | 1.7% |\n| Operating Income | $6 | $7,963 | $(7,957) | (99.9)% |\n| Adjusted EBITDA | $17,706 | $20,481 | $(2,775) | (13.5)% | - Organic net revenue increased by 1.5% ($2.2 million), driven by new clients and increased spending by existing clients in consumer products and communications sectors[160][161][162] - Depreciation and amortization increased by $3.5 million (42.0%) due to accelerated amortization of certain tradenames[160][161][162] - Deferred acquisition consideration increased by $1.1 million due to fair value increases of certain obligations[160][161][162] - Occupancy-related expenses decreased due to the Company's real estate consolidation initiative[160][161][162] Communications Network The Communications Network's Q2 2024 revenue surged 29.9% to $105.6 million, operating income rose 23.2% to $14.4 million, and Adjusted EBITDA increased 53.5% to $22.2 million, driven by 12.4% organic net revenue growth - | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $105,570 | $81,297 | $24,273 | 29.9% |\n| Net Revenue | $72,393 | $61,645 | $10,748 | 17.4% |\n| Operating Income | $14,433 | $11,716 | $2,717 | 23.2% |\n| Adjusted EBITDA | $22,173 | $14,448 | $7,725 | 53.5% | - Organic net revenue increased by 12.4% ($7.7 million), driven by new clients in healthcare and consumer products, and increased revenue in communications and public affairs sectors due to the political campaign year[167][168] - Net acquisitions (divestitures) increased net revenue by $3.2 million, primarily from the acquisition of PROS[167][168] - Deferred acquisition consideration increased by $4.3 million due to an increase in the fair value of a certain obligation[167][168] All Other The 'All Other' category's Q2 2024 revenue significantly decreased 62.6% to $3.2 million, leading to a 64.0% operating loss increase to $8.8 million, and a 33.7% Adjusted EBITDA decrease to $(3.1) million - | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $3,220 | $8,600 | $(5,380) | (62.6)% |\n| Net Revenue | $3,021 | $8,600 | $(5,579) | (64.9)% |\n| Operating Loss | $(8,775) | $(5,351) | $(3,424) | 64.0% |\n| Adjusted EBITDA | $(3,149) | $(2,356) | $(793) | 33.7% | - Organic net revenue decreased by 41.4% ($(3.6) million), due to budget cuts and client losses in food and beverage, travel, financial services, and consumer products sectors[173][174][175] - Depreciation and amortization increased by $2.9 million due to accelerated amortization of certain tradenames[173][174][175] - Net acquisitions (divestitures) decreased net revenue by $1.6 million, driven by the derecognition of certain noncontrolling interest[173][174][175] Corporate Corporate operating loss decreased 30.8% to $(20.9) million for Q2 2024, primarily due to a $9.5 million decrease in stock-based compensation, despite a $3.7 million increase in staff costs - | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Operating Loss | $(20,871) | $(30,177) | $9,306 | (30.8)% |\n| Adjusted EBITDA | $(18,622) | $(16,511) | $(2,111) | 12.8% |\n| Staff Costs | $12,154 | $8,437 | $3,717 | 44.1% |\n| Stock-based Compensation | $(1,498) | $7,996 | $(9,494) | NM | - Stock-based compensation decreased by $9.5 million primarily due to the reversal of expense associated with stock-based performance awards for which performance targets were not probable of being met[176] SIX MONTHS ENDED JUNE 30, 2024 COMPARED TO SIX MONTHS ENDED JUNE 30, 2023 For H1 2024, Stagwell's total revenue increased 6.9% to $1.34 billion, operating income grew 27.4% to $47.8 million, and Adjusted EBITDA increased 8.0% to $176.4 million, with 1.5% organic net revenue growth Consolidated Results of Operations Consolidated revenue for H1 2024 increased 6.9% to $1.34 billion, operating income rose 27.4% to $47.8 million, and Adjusted EBITDA increased 8.0% to $176.4 million - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $1,341,227 | $1,254,709 | $86,518 | 6.9% |\n| Net Revenue | $1,086,846 | $1,066,523 | $20,323 | 1.9% |\n| Operating Income | $47,761 | $37,495 | $10,266 | 27.4% |\n| Net Loss Attributable to Stagwell Inc. Common Shareholders | $(4,247) | $(1,805) | $(2,442) | 135.3% |\n| Adjusted EBITDA | $176,419 | $163,390 | $13,029 | 8.0% | - Organic net revenue increased by $15.8 million (1.5%), driven by new wins in consumer products and increased revenue in communications and public affairs sectors[181][183][184] - Net acquisitions (divestitures) increased net revenue by $3.9 million, primarily due to acquisitions of Team Epiphany, Movers and Shakers, and Left Field Labs, partially offset by the sale of ConcentricLife[181][183][184] - Interest expense, net, increased by $2.6 million due to higher debt outstanding and interest rates[181][183][184] - Impairment and other losses decreased by $8.8 million (83.8%) as the prior year included significant lease asset impairments[181][183][184] - | EPS Metric | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 |\n| :--------- | :--------------------------- | :--------------------------- |\n| Diluted EPS | $(0.04) | $(0.01) |\n| Adjusted Diluted EPS | $0.30 | $0.31 | Integrated Agencies Network The Integrated Agencies Network's H1 2024 revenue increased 4.4% to $737.9 million, but operating income decreased 2.0% to $59.5 million, and Adjusted EBITDA declined 5.1% to $128.1 million, with 1.8% organic net revenue decline - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $737,852 | $706,840 | $31,012 | 4.4% |\n| Net Revenue | $614,642 | $624,333 | $(9,691) | (1.6)% |\n| Operating Income | $59,464 | $60,649 | $(1,185) | (2.0)% |\n| Adjusted EBITDA | $128,103 | $134,965 | $(6,862) | (5.1)% | - Organic net revenue decreased by 1.8% ($(11.2) million), due to lower spending by large clients in healthcare and financial services, partially offset by new client wins in consumer products, technology, and communications[202][203] - Net acquisitions (divestitures) increased net revenue by $1.5 million, primarily from acquisitions of Epiphany, Movers and Shakers, and Left Field Labs, partially offset by the sale of Concentric[202][203] - Stock-based compensation increased by $4.8 million due to fair value increases of deferred acquisition consideration arrangements and more share-based awards granted[202][203] - Deferred acquisition consideration decreased by $2.5 million due to acquisitions and a reduction in fair value of certain obligations[202][203] Brand Performance Network The Brand Performance Network's H1 2024 revenue increased 3.3% to $391.2 million, but operating income decreased 36.7% to $13.7 million, while Adjusted EBITDA increased 4.1% to $45.2 million, with 3.2% organic net revenue growth - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $391,207 | $378,661 | $12,546 | 3.3% |\n| Net Revenue | $319,670 | $306,122 | $13,548 | 4.4% |\n| Operating Income | $13,701 | $21,661 | $(7,960) | (36.7)% |\n| Adjusted EBITDA | $45,200 | $43,429 | $1,771 | 4.1% | - Organic net revenue increased by 3.2% ($9.9 million), due to new clients and increased spending by existing clients in communications, consumer products, and food and beverage sectors[207][208][209] - Depreciation and amortization increased by $3.0 million due to accelerated amortization of certain tradenames[207][208][209] - Deferred acquisition consideration increased by $1.5 million due to an increase in the fair value of certain awards[207][208][209] Communications Network The Communications Network's H1 2024 revenue surged 34.9% to $199.3 million, operating income increased $19.3 million, and Adjusted EBITDA grew $23.1 million to $41.6 million, driven by 19.2% organic net revenue growth - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $199,316 | $147,756 | $51,560 | 34.9% |\n| Net Revenue | $139,881 | $114,616 | $25,265 | 22.0% |\n| Operating Income | $30,706 | $11,364 | $19,342 | NM |\n| Adjusted EBITDA | $41,557 | $18,460 | $23,097 | NM | - Organic net revenue increased by 19.2% ($22.0 million), due to new clients in healthcare and consumer products, and increased revenue in communications and public affairs sectors due to the political campaign year[214][215] - Net acquisitions (divestitures) increased net revenue by $3.5 million, primarily from the acquisition of PROS[214][215] - Deferred acquisition consideration increased by $2.7 million due to an increase in the fair value of certain obligations[214][215] All Other The 'All Other' category's H1 2024 revenue decreased 40.1% to $12.9 million, resulting in a 56.5% operating loss increase to $15.5 million, and a 15.8% Adjusted EBITDA decrease to $(7.1) million - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Revenue | $12,852 | $21,452 | $(8,600) | (40.1)% |\n| Net Revenue | $12,653 | $21,452 | $(8,799) | (41.0)% |\n| Operating Loss | $(15,454) | $(9,873) | $(5,581) | 56.5% |\n| Adjusted EBITDA | $(7,135) | $(6,161) | $(974) | 15.8% | - Organic net revenue decreased by 23.0% ($(4.9) million), due to budget cuts and client losses in food and beverage, travel, financial services, and consumer products sectors[222][223] - Depreciation and amortization increased by $3.4 million due to accelerated amortization of certain tradenames[222][223] - Net acquisitions (divestitures) decreased net revenue by $3.3 million, driven by the derecognition of certain noncontrolling interest[222][223] Corporate Corporate operating loss decreased 12.2% to $(40.7) million for H1 2024, primarily due to an $8.5 million decrease in stock-based compensation, despite a $7.0 million increase in staff costs - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change ($) | Change (%) |\n| :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- |\n| Operating Loss | $(40,656) | $(46,306) | $5,650 | (12.2)% |\n| Adjusted EBITDA | $(31,306) | $(27,303) | $(4,003) | 14.7% |\n| Staff Costs | $22,261 | $15,261 | $7,000 | 45.9% |\n| Stock-based Compensation | $2,107 | $10,606 | $(8,499) | (80.1)% | - Stock-based compensation expense decreased by $8.5 million primarily due to the reversal of expense associated with stock-based performance awards for which performance targets were not probable of being met[225] Liquidity and Capital Resources Stagwell's cash increased to $136.1 million as of June 30, 2024, with $(67.6) million net cash used in operations and $138.3 million provided by financing, maintaining debt covenant compliance and sufficient liquidity - | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 |\n| :-------------------- | :--------------------------- | :--------------------------- |\n| Net Cash Used in Operating Activities | $(67,618) | $(144,146) |\n| Net Cash Used in Investing Activities | $(52,183) | $(30,118) |\n| Net Cash Provided by Financing Activities | $138,304 | $58,521 | - Cash and cash equivalents: $136.1 million as of June 30, 2024 (vs. $119.7 million at Dec 31, 2023)[226][230][232] - Available borrowings under Credit Agreement: $290.5 million as of June 30, 2024[226][230][232] - Total debt, net of issuance costs: $1.42 billion as of June 30, 2024 (vs. $1.15 billion at Dec 31, 2023)[226][230][232] - Total Leverage Ratio: 3.56 as of June 30, 2024 (maximum permitted per covenant: 4.25)[226][230][232] - The Company expects future cash flows from operations, existing cash, and Credit Agreement availability to be sufficient to meet anticipated cash needs[228] [Critical Accounting Estimates](index=65&type=section&id=Critical%20Accounting