MDC Partners' stock has yet to recover from news that the holding company is under investigation by the SEC for financial irregularities, yet executives aren't concerned that investors will stay away.
Company CFO David Doft described the probe as a "short term blip."
"I can't predict how long [this investigation] will take. It has taken a few months, and will be a few more months," said Doft, speaking at the Jefferies 2015 Global TMT Conference on Wednesday morning.
When it released first-quarter financial results on April 27,the firm also disclosed that the SEC investigation had been ongoing since last October and that it had sought documents related to the company’s accounting procedures and third-party trading activity.
It also said that expensed items totaling $8.6 million over a six-year period by CEO Miles Nadal had been red-flagged and that Nadal agreed to repay the company for those expense claims. The repayment will be reflected in Q2 results, the firm said.
"[The inquiry] doesn't really have anything to do with operations of our business. The reality at the end of the day is that the business works and has always worked, and [this investigation] has nothing to do with the cash flow of our company."
There hasn't been any client pushback from the news, says Doft. (Investor pushback was swift as the stock lost nearly one-third of its value in the wake of the disclosure.) "We haven't had any [clients leave] and we don't expect to see any. This is an interesting business because clients leave all of the time. They don't need a reason like this to leave you. They will leave. It is not like there has to be some catalyst to let them out of the contract."
Nonetheless, Doft admits that clients are not entirely overlooking this investigation. "Admittedly, a small handful [of clients| have asked questions." But MDC Partners has prepared its agency partners regarding what to say and how to talk about this "non-event."
One reason that MDC Partners downplays this SEC challenge is because it believes the parent holding company operates at a level far removed from individual agencies.
"They really operate separate from us. They win business because they are great at what they do and have success with clients on a consistent basis separate from the parent company. And I don't expect anything will change," says Doft.
The SEC inquiry isn't stopping MDC Partners from seeking ways to optimize its profits. Doft cites three key areas to drive margin expansion. First, international growth. Over the past few years, MDC has increased its revenue outside of America from zero to 7%. Still, competitors generate 55% of their revenue overseas. "Technology has become a great equalizer. In the past, you literally had to open offices all around the world," says Doft. "With globalization, we can be efficient in regional hubs."
The media-buying space is another priority. Programmatic technology has democratized the media buying space to allow MDC to compete where scale used to be the biggest differentiator, says Doft. "We are hiring [analytic experts] within creative agencies [that give us the] ability to continually evolve as new technology emerges to drive efficiencies that [we] haven't even put a number on that yet."
MDC Partners is also focusing on portfolio management.
"Our portfolio's number of assets is about 50 different agencies. Not everyone's perfect," says Doft. Some agencies lose clients or undergo leadership changes. Hence, executives will make changes to boost incremental margins on a case-by-case basis. For instance, the decision to divest Accent Marketing Services for $16 million plus working capital adjustments (the agreement was announced earlier this week) would improve its margins by 60 basis points.
Ultimately, MDC Partners believes strong performance will ease any current concerns about the ongoing investigation. "We refocus our company around fastest growing higher margin businesses and keep doing what we laid out and keep performing what investors come to expect from us," says Doft, who did not do a formal Q&A with attendees following his remarks.
MDC Partners stock stood at $20.52 in mid-morning trading today, down about 27% from the disclosure of the SEC inquiry a little over two weeks ago.