MDC Partners stock dropped 7% in after-hours trading following the company’s release of Q2 earnings which disclosed flat revenues for the period ($337 million), missing consensus Wall Street expectations. Organic growth was a paltry 0.3%.
Net income attributable to MDC Partners was $1.2 million compared to $29.6 million for the second quarter of 2015.
"This was a challenging quarter for our business," said company CEO Scott Kauffman. "While our financial results in the second quarter were below our expectations, there's no doubt that we have a very strong underlying business that is positioned for meaningful growth in the second half of the year and beyond."
The under-performance occurred across all areas of the company’s business. Revenue for the first six months of 2016 was $646.1 million, an increase of 1.1%, while the effect of foreign currency translation was negative 1%, the impact of net acquisitions was positive 0.9%, and the resulting organic revenue growth was 1.2%.
"We believe that it is prudent to revise our full-year 2016 guidance to reflect our softer-than-anticipated second quarter results," says David Doft. The company had initially provided guidance that revenues might increase by as much as 8.6%. Now, the firm believes that 2016 revenues will rise between 4.8% and 7.1%.
There are several reasons for this downturn, the company say, including client losses, a decrease in billable pay-through costs, and the delay between winning accounts and actually monetizing those accounts.
MDC has announced some notable new clients this year, including Beats by Dre, Hershey's, and Adidas. In all, MDC reported net new business of $36.9 million (revenues) in Q2 and $56.8 million year-to-date. "We can't make up for these lost months of revenue," says Doft noting that it costs around $1 to $2 million associated with these new wins to staff up and get ready for these clients.
Internal costs also impacted the bottom line. MDC suffered from deferred acquisition payments, and the network continues to pay for its earlier misdeeds. Costs associated with the ongoing SEC investigation related to its former CEO Miles Nadal were $2.85 million thus far in 2016 and $13.7 million in 2015.
MDC has removed one level of corporate (including former COO Andre Coste) to enable a "seamless flow of information" between the agencies and Kauffman in order to facilitate quicker decision-making. That translates to an 8% reduction in corporate staff that will result in savings in 2017. MDC has also made changes to its board of directors, including recently adding Telesat's Dan Goldberg.
That said, these numbers are disappointing to analysts who predicted revenue would rise to $346 million. "I am not happy with the increase in accounts receivable to $400 million," says Albert Fried's Richard Tullo, though MDC did beat its "estimate on EBITDA mostly on higher non-cash costs versus our model and better operating income."